Going to the doctor just got a little cheaper. Well, sort of. Eligible folks covered by a high-deductible health insurance plan (HDHP) can score tax deductions three ways with a health savings account. Plus, family limit contributions for 2016 have edged up, allowing taxpayers to sock away even more cash to save and pay for medical bulls not reimbursed by insurance.
Health Savings Accounts (HSAs) are medical savings accounts that are an option for those enrolled in an HDHP. They don't tie people down with the old "use it or lose it" requirements of a flexible spending account. HSA funds stay in your account, accumulate, and grow year over year if you don't use them.
Investors can withdraw funds anytime to pay qualified expenses such as doctor visits, lab tests, health screenings, hospital stays, surgery, and even prescription medicines. "Taxpayers can pay with an HSA debit card offered by most plans or pay from other funds and reimburse themselves from their HSAs as long as the expense was incurred after they opened the HSA,” says Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block.
It's a Triple Whammy
- Pretax contributions
- The HSA account grows tax free
- Withdrawals to pay for qualified medical expenses are tax free
In order to contribute to an HSA, taxpayers must have a high-deductible health plan (HDHP). For 2015 and 2016, your plan would need to have a minimum annual deductible of $1,300 for self-only coverage or $2,600 for family coverage to qualify. If you aren't sure your plan qualifies, ask your insurance provider.
For 2016, those with single coverage can contribute $3,350 to an HSA, while those with family coverage can contribute slightly more, up to $6,750. Investors age 55 and older can make an additional $1,000 catch-up contribution, which remains the same. See the table below.
|Maximum contribution amount|
|Single coverage (no change)||$3,350
|Age 55 or older (no change)||$4,350
|Age 55 or older||$7,750
|Minimum HDHP deductible|
|Single coverage (no change)||$1,300
|Family coverage (no change)||$2,600
|Maximum HDHP deductible plus out-of-pocket co-payments and other amounts|
Source: The Tax Institute at H&R Block
Good To Know
1. Take it with you. HSAs are portable. If you have an employer-sponsored HSA and you change jobs or stop working, the HSA goes with you.
2. HSAs can be an additional retirement planning tool. Funds can be used to cover many kinds of expenses not covered by Medicare and for which you no longer have insurance—dental bills, for instance. You can even use funds to reimburse yourself for Medicare, but not tie-in plan premiums, says Perlman.
3. You can invest the funds, similar to an IRA account. "You can invest HSA funds in stocks, bonds, mutual funds, and ETFs. However, keep in mind that, unlike an IRA, which you’d expect to leave alone until retirement, you may need your HSA funds on a much shorter time horizon," says Perlman.
4. You can pay family members’ bills. You can use your HSA to pay qualified medical expenses for your spouse, dependents, and adult children under 26—even if you have self-only health coverage, says Perlman.
5. Watch out. Withdrawals not used for qualified medical expenses are fully taxable and may also be subject to a 20% penalty.