The 2018 tax season is underway.
As area taxpayers start organizing necessary documents in preparation for filing their taxes, questions about deductions and other benefits are likely crossing their minds, including whether or not it makes sense to open a health savings account (HSA) this year – provided they even know what that is.
What is a Health Savings Account and who’s eligible to open one?
An HSA is a tax-advantaged medical savings account linked to a qualified high-deductible health insurance plan. It allows you to use pre-tax dollars to pay for qualified medical expenses such as deductibles, copayments, coinsurance, prescription drugs, eyeglasses and other costs both now and in the future. To be eligible, you must be enrolled in a qualified high-deductible health insurance plan. If you have an insurance plan through your employer, but your employer doesn’t offer an HSA, you can still open an HSA account on your own – again, as long as you’re enrolled in a high-deductible health plan. If your employer does offer an HSA, they might generously contribute toward your account and also allow your personal contribution via payroll deduction. Confirm this with your employer’s benefits specialist.
What tax advantages are associated with opening an HSA?
The money you contribute toward an HSA is tax-deductible, along with withdrawals for qualified medical expenses. We at Merrill Lynch like to refer to an HSA as “triple tax-advantaged” as you benefit from money going into the account, as the money grows in the account, and when you make withdrawals.
How much can I contribute annually to an HSA?
For an individual HSA, the 2018 employer-employee combined contribution limit is $3,450. For an HSA linked to a family health plan, the contribution limit is $6,900. If you are 55 years of age and older, you can make a “catch-up contribution” of $1,000 annually.
How can I withdraw HSA funds?
Depending on your provider there are many options. Most HSA administrators provide access to funds with a debit card and also online bill paying. If you choose to pay with cash or an alternative form of payment, you can easily reimburse yourself with a direct transfer of funds from your HSA to your personal bank account Confirm with your employer or HSA administrator.
Can I use my HSA in retirement?
Yes. In fact, as you would with an IRA or 401(K), the sooner you open an HSA, the more money you will have in it for retirement – when your medical bills will likely increase. Once you are 65 years of age and older, you can use your HSA to pay for Medicare premiums for Parts A, B, or D with tax-free withdrawals as you would with any other medical expenses. You can also use your HSA to pay for long-term care insurance premiums.
Are there any time restrictions on when I can use my HSA funds?
There are no time restrictions, and you’re not required to make any withdrawals from your HSA by any given date, such as the end of the year. There are no minimum distribution requirements like a 401(k) or IRA so your money can continue to grow throughout retirement. If you lose your job, but continue insurance coverage under COBRA, you can use your HSA to pay your premiums. Your HSA is entirely portable. You can keep it independent of where you work or combine it with another HSA with a new employer.
Vince Fertitta is a Merrill Lynch Texas Mountain South Division executive