An account created for individuals who are covered under high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover. Contributions are made into the account by the individual or the individual’s employer and are limited to a maximum amount each year. The contributions are invested over time and can be used to pay for qualified medical expenses, which include most medical care such as dental, vision and over-the-counter drugs.
The HSA account has three major tax savings: the money contributed into the account is tax deductible, it grows tax free, and certain withdrawals are tax free if they are for qualified medical expenses. To qualify for an HSA account, you must have coverage from a high-deductible health plan and you must not be enrolled in Medicare or be listed as a dependent on another person’s tax return.
What is an HSA?
An HSA works like an IRA, except that money is used to pay health care costs. Participants enroll in a relatively inexpensive high deductible insurance plan. Then, a tax-deductible savings account may be opened to cover current and future medical expenses. The money deposited, as well as the earnings, is tax-deferred. The money can then be withdrawn to cover qualified medical expenses tax-free. Unused balances roll over from year to year.
Everyone (not just the self-employed or small businesses) with a qualified high deductible insurance plan is eligible for a tax-deductible HSA.
What happens to my HSA if I am no longer enrolled in an HSA-compatible health plan?
You will no longer be eligible to contribute to the HSA. However, you will still have access to the HSA, and can use the funds as you choose. Withdrawals for qualified medical expenses will still be tax-free.
How much can I contribute to my HSA?
In 2013, you may contribute up to the annual IRS limit: $3,250 for individuals or $6,450 for families. Individuals age 55 and over may also contribute an additional $1,000 per year in catch-up contributions. If you were eligible to make HSA contributions in the prior tax year, you may make prior-year contributions to your HSA up until the deadline for filing your federal income tax return, which is typically April 15.
Can my spouse and I both contribute to an HSA?
You and your spouse cannot have a joint HSA. However, if you are both eligible, you can both have HSAs. You will need to divide the maximum HSA contribution limit between the two of you. If you have questions about allocating contribution limits between spouses, please consult your tax advisor.