Note: This is the first of a three-part series. Look for future posts on growing your HSA funds and distributing (or spending) your HSA funds.
Health savings accounts (HSAs) are one of the most tax-advantaged accounts allowed by the IRS, and every year more people are discovering the benefits of an HSA. In addition to helping people save for current healthcare expenses, HSAs can be used to save for retirement as well.
Because HSAs provide major tax advantages to accountholders, the IRS has created certain rules that govern how accountholders can contribute to their HSAs.
The following are some of the important things you need to know about contributing to an HSA:
1. There is a limit to how much you can contribute to an HSA every year
For 2018, the IRS has stipulated that an individual can contribute up to $3,450 to their HSA and a family can contribute up to $6,900. The year an accountholder turns 55, he or she can contribute an additional $1,000 annually (regardless of individual or family coverage).
These contribution limits are the total amount that can be put in an accountholder’s HSA, including from payroll deductions, employer matches and participating in wellness programs. Contributing more than that amount to your HSA will lead to a 6 percent tax on excess contributions that applies every year the excess contribution amount remains in the account.
2. Contributions to your HSA are not taxed
HSAs are triple-tax advantaged. The first tax advantage comes from the fact that funds are not taxed going into the account. The funds are also not taxed when they grow or are spent on qualified medical expenses, but we’ll discuss these tax advantages in a later post.1 In addition, if an employer contributes to an employee’s HSA, their payroll and FICA tax liability is reduced.
3. There may be times when HSA contributions have to stopIn order to contribute to an HSA, the accountholder must be covered by an HSA-qualified high-deductible health plan, cannot have any other health coverage (Medicare, military health benefits, medical FSAs, etc.). Accountholders cannot be claimed as a dependent on another person’s tax return. If any of these changes occur, the accountholder can no longer contribute to their HSA, but they’re still able to use the funds already in their HSA for qualified medical expenses.
Contributing funds to an HSA is a great way to save for healthcare expenses and plan for retirement. As long as accountholders follow the rules when it comes to contributions to an HSA, they can take advantage of the many tax benefits that HSAs provide.
1 HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Please consult a tax advisor regarding your state's specific rules.
Nothing in this communication is intended as legal, tax, financial, or medical advice. Always consult a professional when making life-changing decisions.