An HSA is a tax-sheltered account for individuals to save for medical expenses that aren’t covered by high deductible insurance plans. You can use an HSA account to meet your current health plan deductible and other out of pocket expenses. And you can contribute to an HSA regardless of your income.
What are the requirements for opening an HSA in 2024?
The annual deductible for your current healthcare plan must be $1,600 or more a year for singles ($3,200 for couples), your annual maximum out-of-pocket expenses must be less than $8,050 for individuals or $16,100 for families, and you must not be on Medicare.
Benefits
HSAs have one very attractive and unique benefit – they are triple tax sheltered. They are funded with pre-tax dollars that are deducted from your gross income or excluded from income if contributed by your employer.
All contributions grow on a tax-free basis, and withdrawals are tax-free if the money goes for qualified medical expenditures (detailed below).
Healthcare cost projections later in life
An August 2018 survey done on behalf of the nonprofit Employee Benefit Research Institute found that:
In 2019, a 65-year-old man with $79,000 in savings and a 65-year-old woman with $104,000 in savings have a 50 percent chance of having enough to cover Medicare and supplemental-plan premiums and median prescription drug expenses in retirement.
At age 65, a couple with median prescription drug expenses needs $183,000 in savings for a 50% chance of having enough to cover healthcare expenses in retirement. Note these odds are equivalent to flipping a coin.
If that doesn’t concern you, it should, unless you believe you will have that covered by other retirement assets. Also keep in mind that increases in medical expenses have exceeded the general inflation rate in the past.
How HSAs work
Pre-tax annual contributions in 2024 can be made for individuals up to $4,150, contributions of $8,300 can be made by people with family insurance coverage, and an additional catch-up contribution can be made of $1,000 for individuals 55 years of age and older.
HSAs can be rolled over to spouses without taxation.
You can withdraw money any time without penalty for qualified medical expenses for you, your spouse, and any dependents. These are qualified medical expenses: co-payments, co-insurance, health insurance deductibles, dental and vision care, prescription drugs, Medicare Part B and Part D prescription-drug premiums, wheelchairs and walkers, hearing aids, X-rays, ambulance services, long-term care services, nursing home expenses, and nursing services at home.
If you withdraw money for non-medical reasons there is a 20% penalty in addition to the withdrawal being taxed as ordinary income, but once you are age 65 or older, distributions for non-medical expenses such as paying Medicare medical insurance premiums, employer-provided health insurance, COBRA, or long term care insurance are not subject to the 20% penalty.
There is no time limit on when the funds can be used. And there is no “use it or lose it” provision; once the funds are contributed they remain in your account until they are withdrawn. They do not have Required Minimum Distribution requirements.
What to look for in HSAs
If you begin looking into options for HSAs, pay special attention to maintenance fees and investment options; they can vary widely and are critical in the choice of plans as they can significantly affect account balances over time. Banks, credit unions, and some large investment firms offer HSAs; if you want to treat your HSA as a sort of triple tax advantaged IRA that’s reserved for health care expenses, then you should probably start your research with the large investment firms.
If you have an HSA with your current employer and expect to change employers, ask if your HSA balance can be transferred. If so, make sure it is a trustee to trustee transfer to avoid any tax issues.