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A health savings account (HSA) is a tax-advantaged medical savings account available to individuals who are enrolled in a high-deductible health plan (HDHP). HSAs can be invested in a manner similar to that of IRAs and have three distinct tax benefits:
- Contributions reduce taxable income
- Earnings from interest and investment income are tax-deferred
- Withdrawals to pay for qualified medical expenses are tax-free
However, the IRS has strict guidelines regarding HSAs… you can open and contribute to a HSA if you:
- Are covered by a high-deductible health plan (HDHP) on the first day of the month (please see this link for more information regarding HDHPs)
- Not covered by other health insurance
- Not be enrolled in Medicare
- Not be eligible to be claimed as a dependent on someone else’ tax return
For 2023, the contribution limit to an HSA is $3,850 for individuals and $7,750 for family coverage. Additionally, people age 55 years and older can make catch-up contributions of $1,000 per year. The limits will increase to $4,150 for individuals and $8,300 for families in 2024.
Unlike Flexible Savings Accounts (which also allow individuals to set aside money tax-free to pay for out-of-pocket health care expenses), the amounts in HSAs are not forfeited if not used by year-end; the money will roll forward indefinitely. The funds in HSAs can be withdrawn at any time, however, the withdrawals are taxable with a potential 20% penalty for under-65 individuals if they are not used to pay for qualifying healthcare expenses. After the age of 65, the account owner may take distributions from the HSA for any purpose, without penalty (although income taxes would still be owed for non-medical expenses).
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