Health savings accounts - better known as "HSAs" - rise in prominence around tax time as a great way to keep more of your own money in your pocket and less of it in Uncle Sam's pocket.
Plus, you're stashing money away for health care expenses - for the rest of your life.
Sound too good to be true? Not when you review the facts.
HSAs are unique personal financial accounts that enable Americans to fund those accounts, to a specific level, and use those proceeds to pay for current and future health care expenses on a tax-advantaged basis.
These accounts are bundled (by government mandate) with qualified High Deductible Health Plans for a one-two punch against soaring medical costs. Health care consumers can use HDHPs for significant health care expenses, like a long-term illness or significant injury, while the HSA can be used to pay for smaller health care expenses until the HDHP plan deductibles are reached.
Once your HSA plan has $1,000 in contributions, plan holders can begin using the account's investment component, allowing plan funds to grow even higher. HSA plans offer limited investment options (mostly mutual funds) but plans do offer a wide array of such funds for users to choose from.
Quite literally, health savings accounts are yours to use for life, with a surprising lack of mandates or regulations, outside of plan contribution limits and which medical expenses the funds can pay for.
The fund can stay open for as long as you're alive, right through your retirement years, no matter if you change health plans or not. Better yet, any funds in the plan never expire - they're yours for life, too.
HSA Plan Eligibility Requirements
You'll need to qualify for an HSA plan, under the following stipulations:
- You have to be enrolled in a High Deductible Health Plan that doesn't cover all major medical costs.
- You cannot be covered by another health care insurance plan, or a government-sponsored plan like Medicare.
- You cannot be claimed by another individual on his or her tax return.
HSA Plan Contribution Deadlines
For the 2018 tax year, ending April 15, 2019, HSA plan contribution's deadlines are as follows:
- Open deadline: April 15, 2019
- Plan Funding deadline: April 15, 2019
HSA Plan Contribution Limits
HSA plan contribution limits for 2018 and 2019 stand as follows:
- For 2018 tax year: Contribution limit (individual) = $3,450
- For 2018 tax year: Contribution limit (family) = $6,850
- For 2019 tax year: Contribution limit (individual) = $3,500
- For 2019 tax year: Contribution limit (family) = $7,000
Note that HSAs also offer a $1,000 "catch-up" provision for plan holders aged 55 or older.
Health Savings Accounts vs. Health Reimbursement Accounts (HRAs)
Health Savings Accounts are often confused with Health Reimbursement Accounts, but there is a distinct difference.
- Health Savings Accounts are opened and controlled by individuals, and requires account holders to also enroll in a high-deductible HDHP plan before he or she can open up an HSA account.
- Health Reimbursement Accounts aren't opened and managed by individuals, they're opened and managed strictly by employers, who offer them to employees to rein in health care costs.
Additionally, health savings accounts are often confused with Flexible Savings Accounts (FSAs).
The difference there? First, self-employed individuals, a growing demographic in the age of the freelancer, aren't eligible for FSAs.
Also, FSA users have to let their employer know in advance how much they wish to deduct from their paychecks to be steered into a flexible savings account on an annual basis. Once that amount is declared and noted by the employer, it can't be changed.
Plus, you must spend all of your declared FSA fund contributions by the end of the calendar year. Any cash remaining in an FSA account can be taken away if it's not all spent by the annual deadline.
Health Care Savings Account Benefits
Health Care Savings accounts offer plan holders three good reasons to open an account, and they all involve significant tax advantages, as follows:
- Tax-free plan contributions. Any cash you stash away into an HSA is tax-free, from a federal tax standpoint. Additionally, most U.S. states allow HSA contributions to be made on a tax-free basis, as well.
- Tax-free investment gains. With HSAs, any money earned in plan investment accounts is deemed by Uncle Sam as tax-free. That stacks up even more money in your HSA.
- Tax-free withdrawals. With HSAs, users don't have to pay taxes on any withdrawals, either, as long as those withdrawals are used for qualified medical expenses.
There are additional benefits with HSA plans, as well.
As a plan user, you can not only decide how much cash you want to save in an HSA, you can also decide which qualified medical expenses you want to pay using plan funds, and which expenses you don't want to pay. In other words, as long as you're operating in the parameters of HSA guidelines on qualified medical expenses, nobody can tell which expenses to pay for - that's your decision.
Additionally, you're allowed to carry any unused HSA plan money forward into the next tax year, with no penalty or fees incurred.
How to Open a Health Savings Account
If you're qualified to own an HSA, actually opening an account is easy:
First, choose your health savings plan program provider. Most major mutual fund companies and many banks and brokers offer health savings plans. Also, many companies offer health care savings accounts, as well.
In general, you'll reach out to your fund company or other financial institution, complete an easy-to-finish HSA plan application, choose your funds, and pay your initial deposit.
You'll also likely be asked to make recurring monthly, quarterly, semi-annual or annual fund deposit amounts.
Where You Can Select Your Health Savings Account
If you want to open a health savings account, and have fulfilled the main requirements, job one is to choose the right HSA provider for your unique needs.
The options are many, as HSA consumers can choose from hundreds of plans from hundreds of companies.
HSAs are available at a host of financial institutions, including banks, mutual fund firms, credit unions - even insurance companies. The website HSASearch.com offers a good database of trusted and experienced HSA providers.
Many U.S. employers also offer staffers health care savings accounts, although they don't have to. There are some good benefits from relying on your employer for a good HSA plan.
Contributions to your HSA made by your employer may be excluded from your gross income.
No matter who is running your HSA plan, you'll be facing multiple fees when opening a health savings account. Those fees cover the opening of an account, the closing of an account, fees for paper statements, and ongoing HSA plan management fees.
The fees aren't substantial - likely around $5 or $10 per month, and they can be waived if you have a substantial amount of money put away in your account.
Lastly, your health care savings account provider will provide you with a plastic debit card to make qualified medical care purchases and to pay bills. HSAs also allow users to pay health care costs by check, by digital-bill payment, or in a growing number of cases, via a mobile app.
Health savings accounts are a great way to save money for medical care costs, both big and small, while also allowing account users to save money on taxes.
With health care prices skyrocketing and no guarantee that the Affordable Care Act will even be in play a few years from now, HSA plans represent a savvy insurance policy that helps cover health care costs that literally lasts your entire life.
In the process, you're boosting your net worth in the process. When you really look at health savings accounts, they start looking better all the time.
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