Although health savings accounts, known as HSAs for short, are considered one of the best investment choices available, many people know little or nothing about them. HSAs can be better than 401(k)s, IRAs, and even Roth IRAs.
Perhaps it isn't well known due to its name. Perhaps some people view it as more of an insurance policy. Regardless of the reason, if you are eligible to have one, it is wise to learn more about what these little-known investment accounts entail. It can have a significant financial impact on you and your family for years to come.
What Are Health Savings Accounts?
Although a 401(k) or IRA account can offer a reduction on your taxes without incurring taxes over the years, you still pay income tax on any distributions you take to fund your years of retirement. Roth IRAs do not offer reductions on current taxes, but any distributions taken at retirement are tax-free. Health savings accounts offer triple tax benefits: contributions are tax deductible, the funds are tax-free upon withdrawal (if managed appropriately), and your earnings can grow tax-free over the years.
Who Is Eligible?
A health savings account is intended to help individuals set aside money to cover health care expenses. Unfortunately, some people do not qualify for an HSA account. To be eligible, you need to be enrolled in an HDHP (high-deductible health plan). In 2017, HDHP plans are defined by having a minimum of $1,300 deductible for an individual and $2,600 for a family. The plan is also required to limit co-pays and other out-of-pocket expenses to $6,550 per individual and $13,100 per family.
How Much Are You Allowed to Contribute?
2017 rules dictate that $3,400 is the maximum contribution for an individual, while families can contribute 56,750. Individuals over the age of 55 are allowed to put in "catch up" contributions of $1,000 on a monthly basis. They can also make lump sum contributions for the prior year up until the tax return deadline, typically April 15. If your health insurance is through your employer and is an HDHP, your contributions can be made through payroll deduction. Some employers even offer contribution matching as a benefit. Be aware that you are no longer allowed to make contributions once you are 65 and enroll in Medicare.