Last Wednesday, Dr. Katy Votava, founder and president of Goodcare.com, presented a one-hour webinar on Health Savings Accounts (HSAs): Myths, Misconceptions, and Practical Uses.
"We don't have any [other type of] account like this," she told several hundred online participants.
HSAs, she explained, are the most tax preferred savings accounts available in the U.S. Launched more than a decade ago, they act like a personal bank account but with a few key differences. First among them: money goes in tax-free, grows tax-free, and comes out tax-free if used for qualified medical expenses, the definition of which is extensive.
"To have an account, you have to have a certain type of health insurance," she said. Generally, that's a high deductible plan, but not all high deductible plans are HSA eligible. It's a good idea to check in advance.
Another key benefit, she said, is that "it's not a use-it-or-lose-it account." If, for instance, you change health plans to one that is not HSA eligible--perhaps when changing jobs, say--you can still use the funds accrued in the HSA. "But you cannot contribute new dollars," if you no longer have an eligible health plan, she added.
You also cannot contribute if you are "claimed as a dependent on someone else's tax return," she said, or if you're enrolled in Medicare. Anyone who receives Social Security benefits is automatically enrolled in Medicare part A and, thus, not allowed to contribute to a HSA.
As with any personal savings account, HSAs are custodied at a financial institution, and you can pick the institution (there's a broad variety these days). Most don't have an annual fee, although she notes that many of them used to, so be careful. You might choose your own bank or, if you're making contributions through a payroll deduction, consider your employer's bank. There's now a wide assortment of investment options, too, so choose carefully.
Yet there are contribution limits. Last year the maximum individual contribution was $3,350, and contributions through April 15, 2017, can count toward 2016's limit. This year the individual maximum is $3,400. The maximum family contribution remains at $6,750. "That's pretax," she noted, a benefit that clients are "picking up at the go-in." Contributions up to the annual limit can be deducted from federal income taxes and from many states' taxes, too. "Check out your particular state," she advised.
Additionally, those who are 55 or older can contribute an extra $1,000 per person per year (but married couples cannot add $2,000 to a shared HSA; instead, each spouse can add $1,000 to his or her individual HSA).
Note that if employers (or loved ones) make contributions for their employees, it doesn't count toward the employee's individual tax deductions.