Health Savings Accounts

Health Savings AccountsHealth Savings Accounts are one of my favorite investment vehicles. There are many advantages, as you will see. With most Americans having high-deductible health plans, and not able to take medical deductions on Schedule A (itemized deductions), HSAs are the way to go!

A health savings account (HSA) is an account created exclusively for the purpose of paying the qualified medical expenses of an account beneficiary. In other words, an HSA is a tax-advantaged savings account that is owned by an employee or self-employed person.

An HSA is available to taxpayers who have a high-deductible medical insurance plan. A high-deductible plan is one with an annual deductible of not less than $1,300 for self-only coverage (2015 and 2016) and $2,600 (2015 and 2016) for family coverage. Annual out of pocket expenses cannot exceed $6,550 in 2016 for self-only plans and $13,100 for 2016 for family plans.

Contributions to an HSA may be made by an individual, by an individual’s employer, or both. If contributions are made by an individual, they are deductible on the tax return. Contributions made by an employer are excluded from the employee’s income.

The maximum amounts for 2016 are $6,750 for a family and $3,350 for an individual. At age 55 you can make catch up contributions in the amount of $1,000 per year.

Individual Who Cannot Contribute:

  • Enrolled in Medicare Part A or B
  • Received medical benefits through the Dept. of Veterans Affairs within the previous three months.

Penalties for Excess Contributions are subject to a 6% tax on the value of the account.

An HSA allows account owners to pay for current health care expenses and save for those in the future. Its first advantage is that contributions are tax-deductible, or if made through a payroll deduction, they are pretax. Second, the interest earned is tax-free. Third, account owners may make tax-free withdrawals for qualified medical expenses.

As employers try to shift health care costs away from the company and onto workers, high-deductible plans are becoming more common. That means more Americans are becoming eligible for HSAs.