If you have a high-deductible health insurance plan, you probably know how important it is to have a Health Savings Account (HSA) to save for those medical expenses that come out of your pocket.
HSAs offer great tax savings if you qualify. What’s so good about them? Well, unlike the well-known flexible spending accounts that operate on the “use it or lose it” principal, you can accumulate funds in HSAs over a period of years without losing your unspent balance. Of course, HSA’s are tax-deductible savings plans, and if you have an employer that offers one, you can deduct the funds from your check with pre-tax dollars. Your HSA can also earn interest and dividends, all of which are tax-exempt at the federal level. And finally, your withdrawals from your HSA are tax-free as long as you use the funds for qualified medical expenses.
Qualified expenses include such things as your health insurance deductible, certain medical equipment, vision care, dental care and prescriptions, among others. Keep in mind, though, that tax-free withdrawals are allowed only for prescription drugs. Over-the-counter drugs do not qualify.
You must be enrolled in a high-deductible insurance plan in order to be eligible for an HSA. You also cannot be covered by another health insurance plan (such as a PPO provided by your spouse’s employer). For 2018, the insurance plan must have a deductible of at least $1,350 for self-only coverage and $2,700 for the family, and the out-of-pocket expenses cannot exceed $6,650 for self-only coverage or $13,300 for family coverage. You can contribute up to $3,450 as an individual to your HSA in 2018. Family contributions max out at $6,900. If you are 55 or older at year end, you are entitled to make a catch-up contribution of an additional $1,000 into the HSA.
Taking money out of your HSA for anything other than qualified medical expenses means you will have to pay income tax on the funds. Additionally, you get hit with a 20% non-qualified withdrawal penalty…ouch!
So how do you set up an HSA if you don’t already have one?
- Get your high deductible health insurance coverage. Start the new year off right with your health insurance coverage in place to qualify you for an HSA.
- Set up your HSA as soon as you get your insurance coverage. You can’t take tax-free withdrawals for medical expenses incurred prior to the account being established so it’s important to get the HSA set up as soon as possible. Many financial institutions offer options for HSAs, so shop around to find the best return on your money. If you are an employee, check with your Human Resources department to find out how to enroll in the company plan.
- Make your first contribution. You have until April 15th of the following calendar year to make a contribution for the previous year.
- Contact your tax preparer to help you calculate your deductible HSA contributions for the year. This will be reported on Form 8889 of the 1040. For contributions, you will receive a Form 5498-SA from your insurance provider telling you how much you put in to HSA during the year.