Health savings accounts can be used to build tax-sheltered nest eggs that can pay out-of-pocket medical expenses with tax-free dollars. Intended to be used in conjunction with high-deductible insurance plans, health savings accounts (HSAs) are designed to help pay your medical expenses until your insurance policy begins picking up expenses.
While health savings accounts pay medical costs and can reduce taxable income, not everyone meets the requirements. To qualify for an HSA, a taxpayer must meet two key prerequisites:
The taxpayer must have a health insurance plan with a high deductible (defined as not less than $1,350 for an individual and $2,700 for a family).
The taxpayer must be under age 65 when setting up the account.
The health savings account can be funded with pre-tax contributions made by employers, tax-deductible contributions made directly by the individual taxpayer, or with rollover funds from certain other accounts.
For 2019, health savings account contributions of up to $3,500 for individuals and $7,000 for families can be made. An additional $1,000 can be contributed by those aged 55 or older to health savings accounts.
The main difference between an HSA and other tax-favored medical savings accounts is that the funds in an health savings account can be invested, and the earnings grow tax-free. Withdrawals used for medical expenses are not subject to income tax.
Also, unlike funds set aside for medical expenses in flexible spending accounts, unspent funds in HSAs remain in the account to grow tax-free year after year. After age 65, withdrawals from a health savings account can be made and used for any purpose penalty-free but not income tax-free.
While health savings accounts may not be the best choice for every business or certain individuals, they are certainly a tax-saving opportunity worth exploring. Contact us for help with your specific situation.