(Updated June 24 to clarify contributions and deductible amounts.)
Health Savings Accounts (HSAs) come with some nice benefits. They are federal triple-tax-advantaged, which is appealing. Money is deposited in the HSA pre-taxed, money in the account grows tax-deferred, and money withdrawn for approved medical expenses is tax-free. But like all financial matters, there are pros and cons to HSAs.
(Note: State tax laws may not allow some of these tax advantages.)
How HSAs Work
HSAs have two parts: a savings account and a High-Deductible Health Plan (HDHP). Money deposited in the savings account is used to pay all medical expenses up to the HDHP’s deductible amount. Then insurance kicks in.
Plan details vary, so check the specifications on your available plans to understand how they work.
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Annual contributions to a HSA are limited to $3,600 for individuals and $7,200 for families. If you make contributions from your own funds, they will be tax-deductible. Contributions do not have to be from “earned income” as is required by an IRA.
Eligible HDHPs must have minimum deductible amounts of $1,400 for individuals and $2,800 for families. Typically, the higher the deductible, the lower the monthly premium. The maximum out-of-pocket expenses can be $7,000 for individuals and $14,000 for families.
Being healthy helps with these plans. Owning these plans makes the most sense when you do not have to withdraw from them.
The HSA savings account belongs to the individual. You’ll take it with you when you change jobs or when you don’t have a job or are retired. It’s not like a Flexible Spending Account (FSA), where you have to spend down the account each year. Instead, you keep the contributions and the growth. You can always use it for medical expenses — even into old age to pay for Medicare expenses, although you cannot contribute to a HSA after Medicare enrollment.
You can use the funds for retirement purposes and not medical expenses. Starting at age 65, you can withdraw funds for retirement purposes paying regular income taxes on withdrawals and without the 20% tax penalty for early withdrawals. And there are no Required Minimum Distributions (RMDs) with a HSA.
What If You Have TRICARE?
HSAs were initially established for self-employed people who had no access to other health insurance. But laws expanded to include more people, and now they are more common among employers and employees. However, the requirement that a person have no other form of health insurance remains.
Employees whose employers offer HSAs can just join the HSA without enrolling in the other more traditional health plans offered by the employer. Check with your employer personnel office for their plan details.
Currently serving family members or retirees (including family members) with TRICARE are not eligible for HSAs if they are enrolled in a TRICARE plan.
So, are you willing to disenroll from TRICARE? Active-duty servicemembers cannot disenroll from TRICARE. For information about enrolling and disenrolling in TRICARE, visit this page.
MOAA does not have tax specialists on staff. Consult your financial adviser, tax specialist, or personnel office for your personal situation.
If you want to know more about Health Savings Account rules, check out IRS Publication 969.
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