Health insurance continues to be top of mind for most of us, not only given rising costs, but also based on the uncertainty of how the health insurance marketplace will change. For 2017, and potentially long into the future, HSAs can continue to provide a tax-free way to pay for medical expenses, act as a triple-tax saving vehicle, and potentially, they can boost your retirement funds. These points considered, HSAs may help drive more certainty and ways to pay for present and future health care needs, as well as general living expenses in the future. Here are key points to consider:
- Health Savings Accounts (HSAs): What they are, how they work, and their tax benefits
- 2017 HSA Contribution Limits
- HSAs as a vehicle for retirement funding
HSA accounts are paired with qualified High Deductible Health Plans (HDHPs) to provide users with tax advantages and ownership (unlike FSA’s, you don’t lose HSA funds at the end of the year). The primary tax advantages are as follows:
- Contributions to the HSA are 100% deductible up to the legal limit, and any funds contributed by your employer are not taxable income.
- Distributions used to pay for qualified health care expenses are drawn out of the HSA tax-free (including those for dental and vision expenses).
- Growth on funds in your HSA account (interest, capital gains, dividends) are tax-deferred, or tax-free if used to pay medical expenses.
2017 HSA rules and guidelines:
- Contributions: Families can contribute up to $6,750 (same as in 2016), and Self-only account holders can contribute up to $3,400 (up from $3,350 in 2016). In addition, account holders age 55 or older can make a catch-up contribution of $1,000, above the previously stated limits.
- HDHP Deductibles must be a minimum of $1,300 for Self-only plans, and $2,600 for Family plans (same amounts in 2016 for both).
- Maximum out of pocket costs for the HDHP plans are $6,550 for Self-only insureds, and $13,100 for Family account holders (same amounts in 2016 for both).
HSA as a long-term savings/retirement vehicle:
Year after year, HSA funds can stay in your account, and keep growing, with all the tax advantages stated above. Funds can be taken out to pay for medical expenses, or left in the account to grow, tax-free. While not a replacement for your 401k and IRA accounts (savings for these should be maxed out first), HSAs provide another vehicle for tax deferred savings, effectively raising the ceiling on the limits you can put away each year.
If you are over age 65, you can then use HSA funds either for medical expenses (tax-free), or for general living expenses, in which case you’d pay only ordinary income tax on the distributions, just as you would with a 401k or traditional IRA distribution. (Note: If you are under age 65, you would pay a 20% penalty tax on top of the regular deferred (ordinary income) tax for any non-medical distributions taken from the HSA account). Clearly, while HSA funds are NOT meant to replace 401Ks, IRA’s, or other retirement planning vehicles, they can add another valuable source of funds for those 65 years of age or older.