HSAs are tax-exempt trusts or custodial accounts that allow you to save money — pre-tax — for future use on medical bills.
“HSAs provide the consumer an option to lower health insurance premiums now and accumulate funds for future health care costs,” says Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.
You can make pre-tax contributions to HSAs, and just like those you make to a 401(k) plan, the contributions will reduce your taxable income for the year. Then, there are tax-free gains. “Any gains on the money in your HSA are tax-free, so you keep 100 percent of any money your HSA savings or investments earn, boosting the amount of money you have to cover your out-of-pocket medical costs,” Papetti says. And as long as the money you withdraw is for qualified medical expenses, you won’t pay any taxes on the withdrawals.
QUALIFYING FOR HSAs
You have to meet several requirements to be eligible for an HSA, says Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown. They include:
1. You must be covered under a high deductible health plan (HDHP) that meets IRS guidelines.
2. You must have no health coverage, except for the HDHP.
3. You must not be enrolled in Medicare.
4. You cannot be claimed as a dependent on someone else’s 2016 tax return.
For 2016, the annual deductible for an HSA-qualified HDHP must be at least $1,300 for individual coverage and $2,600 for family coverage, Papetti says.
SETTING UP AN HSA
The easiest way to get an HSA is to sign up for one offered by your employer. That way, your contributions can be automatically made through payroll, pre-tax, just as those for your employer-sponsored retirement account. Your boss may even contribute to the account. (Think free money.)
But not all companies offer an HSA as a benefit.
If your company doesn’t, you can set one up on your own — as long as you qualify — and you’ll still get the tax benefits.
“If you make contributions on your own, using after-tax dollars, they’re deductible from your federal income tax — and perhaps from your state income tax — whether you itemize or not,” Papetti says. “You can also deduct contributions made on your behalf by family members.”
To open an HSA on your own, arrange to establish an account with a qualified HSA trustee, which can be a bank, an insurance company or anyone already approved by the IRS to be a trustee of IRAs or Archer medical savings accounts.
You can contribute up to $3,350 if you have self-only HDHP coverage, or up to $6,750 if you have family coverage, says Kiely.
The other beauty of an HSA is that it’s portable and not a “use it or lose it” plan. “If you have unused funds in your account, they carry over into the next year,” Kiely says. “If you change jobs, the account stays with you.”
And if you have lower medical costs in any year, you can still contribute, but keep the funds in the HSA for expenses down the road — even throughout your retirement. We all know medical costs are probably only going up in the years to come.
However, HSAs aren’t perfect or the end-all-be-all.
“If you have relatively high health expenses — especially within the first year or two of opening your account, before you’ve built up a balance — you could deplete your HSA or even face a shortfall,” Papetti says.
And, he says, if you decide to take a distribution from the account for nonmedical reasons, the amount you withdraw may be subject to income tax and may be subject to an additional 20 percent tax.
Karin Price Mueller, the founder of NJMoneyHelp.com, writes the Bamboozled consumer affairs column for The Star-Ledger, and the Money and Biz Brain columns for Inside Jersey. Send your money questions to her at Bamboozled@njadvancemedia.com.