Cut Your Medical Costs Through Lower Taxes
9 things to know about health savings accounts
If you’re like most Americans, you’re fighting a rising tide of health care costs. To make matters worse, the continuing battle over health care reform is ratcheting up the tension higher than ever.
Here are nine questions answered about HSAs.
1. What is an HSA?
It’s a federally approved account designed to help you save for qualified medical expenses on a tax-free basis.
2. How does it lower my health care costs?
It reduces your federal income and FICA tax, and possibly your state tax, too. Whatever you deposit into the account up to tax deadline day in April becomes an “above the line” tax deduction for your previous year’s tax return. That means you get the deduction even if you take the standard deduction on your tax return and don’t itemize.
If your employer makes a contribution to your HSA, that money is also not counted as income for you and is not subject to income or FICA tax.
3. How do I set up and use an HSA?
- First you purchase a low-cost, high-deductible health insurance policy available through a growing number of providers. The policy must be one that’s been approved for the HSA program.
- Then you open a dedicated savings account in which you make the tax-deductible deposits to pay for your medical care. Each year, you may deposit up to the amount of the deductible on your insurance policy.
- You’re now set to use the money to pay for your medical care. Once your expenses reach the deductible’s level — if they do — the insurance policy kicks in to begin paying benefits.
- You choose your own doctors. You may spend HSA funds on qualified medical expenses at any time — the list of those expenses is extensive and can be found on the policy. However, as of early 2011 over-the-counter medications cannot be bought with HSA dollars without a doctor’s prescription.
4. Is there a limit on how much I can deposit?
Yes. It depends on such things as type of policy and number of days you were eligible during a year. But the absolute maximums are $3,050 a year for individuals and $6,150 for families. These numbers are subject to change each year.
People older than 55 are eligible to deposit an additional $1,000 under what is called the “catch-up” rule. The idea is to allow more money for medical care as a person ages.
5. What if money is left over in my account at year-end?
Unlike with a flexible spending account (FSA), funds in an HSA roll over and accumulate year to year if not spent. Any money in your account will be added to your next year’s deposits to pay for future medical care.
If you ever decide to stop contributing to your HSA, any money left in it will still be available to be spent on qualified medical expenses.
6. Who qualifies for an HSA?
Your family or you are eligible if:
- You have no other health care coverage except for certain exceptions, such as plans limited to dental and vision care.
- You’re not enrolled in Medicare.
- You’re not claimed as a dependent on someone else’s tax return.
7. How can I open an HSA?
You may sign up through banks, credit unions, insurance companies and other approved companies. Employers may also set up HSAs for employees.
8. How can I tell whether an HSA is right for me?
This depends mainly on your taxable income and your current health care expenses. If both are high, you may be able to use an HSA to make many — even most — of your health care expenses tax-deductible.
9. Where can I get more information?
Read this IRS publication for details. The rules and provisions of HSAs are too complex to cover in full here.
Roll Retirement Money Into a Health Savings Account?
You can make a tax- and penalty-free transfer from an IRA to HSA, but it might not be a good move.
You can roll over money from an IRA to a health savings account without incurring taxes or penalties, but there are very specific rules and it may not be your best option. The size of the rollover is limited to the maximum HSA contribution for the year minus any HSA contributions you have already made for the year. For 2011, the maximum HSA contribution is $3,050 for self-only coverage or $6,150 for family coverage (plus an extra $1,000 if you’re 55 or older). To qualify for an HSA, you must have a health insurance plan with a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage.
Rolling over funds from an IRA to an HSA can provide a tax-free source of money to cover big medical expenses or help you build up your HSA balance. But if you have enough cash, it’s better to make your full HSA contribution with new money because your contributions are tax-deductible and can be used tax-free for medical expenses. Then max out your IRA contributions for the year, too ($5,000 for 2011, or $6,000 if 50 or older by year-end), so you can make the most of both tax-advantaged accounts without having to raid your retirement fund. If you do want to make the rollover, contact both your IRA and HSA administrator and tell them that you want to make a direct transfer.
For more information about health savings accounts, see What to Know About Health Savings Accounts and Health Savings Account Answers. For more information about IRA limits, see The Basics of Roth IRAs.