HSA for December 16, 2017

Health Savings Account Rules Basics

What You Need to Know About Health Savings Accounts

It’s important to know that an individual can set up a Health Savings Account or an employer can add a Health Savings Account option to the so-called cafeteria benefit plan it may already offer.

The Health Savings Account is set up like an IRA and differs from a traditional savings account. A trustee approved by the IRS must be used. Money put in the plan grows tax free and funds withdrawn for qualified medical expenses are also tax free. Unlike the older Flexible Savings Accounts offered in employer cafeteria plans, you don’t have to spend the money put into the account by year end or otherwise lose whatever is left. Money can be rolled over from year to year. This can allow for a nice chunk of money to accumulate that can be withdrawn tax free at age 65.

If part of an employer plan, the money put into the plan is before taxes, including Social Security. Otherwise it is an above-the-line deduction, meaning you don’t have to itemize your deductions to get the tax break and the deduction is not subject to the phase-out rules that make many itemized deductions unavailable to high wage earners.

In order to qualify for a Health Savings Account, the individual or family must purchase a high deducible health insurance policy. These are special policies that have a minimum deductible of $1000 to a maximum of $5000 for an individual and $2000 to $10,000 for a family. The higher the deductible, the lower the premium.

health insurance, medical record, a pen and a stethoscope

Individuals can contribute and deduct the lesser of $2250 or the deductible on the policy: for married couples or families it is double that. If over 55, the contribution and deduction is $600 higher for individuals and $1200 higher for couples and will continue to rise at $100 a year until 2009, where it will be capped at $1000 for individuals and $2000 for families or couples.

Money used to pay qualified medical costs is withdrawn tax free. Money withdrawn in excess of qualified medical expenses is taxed as income and subject to a 10% penalty, unless the owner is disabled or over 65. Any money in the account at death is added to the taxable estate.

There are no income limits on Health Savings Accounts. If started early, when you are still young and healthy, a substantial amount of money could accumulate to either meet higher medical costs as you get older or to use to supplement your income in retirement.

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