Health Savings Accounts (HSAs) are available to people who have high deductible health insurance plans. For 2023, the IRS says HSA qualified high deductible plans must have a minimum deductible of $1,500 for an individual plan and $3,000 for a family plan. The IRS allows the plan to provide preventive care benefits before the deductible is met. However, other medical treatments cannot be paid by a qualified high deductible plan until the consumer pays the deductible amount.
HSA account funds can be helpful for medical expenses, especially for those who do not have a separate emergency fund. Even more appealing to many are the triple tax advantages: federal tax deductions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Money contributed to an HSA through payroll deductions is exempt from federal income and FICA taxes. After-tax contributions are tax deductible even if you do not itemize. Inside your HSA account, any growth from interest and investment earnings are tax free. Withdrawals for qualified medical expenses are tax free.
For 2023, the maximum HSA contribution for an individual is $3,850 and $7,750 for a family plan. An additional $1,000 catch-up contribution is allowed for someone 55 or older. The limit includes employer contributions.
Another advantage of HSA accounts is that account balances can be carried from year-to- year. This fact plus the triple tax advantages mean that HSA accounts can be a great tool for building a retirement nest egg.
Understand the rules: You cannot make contributions to an HSA if you have other health insurance plans, including Medicare. However, you can take still own an HSA account and take tax-free withdrawals for qualified medical expenses. Vision and dental care expenses qualify. Medical insurance premiums are not qualified expenses until you reach age 65. At that age you can take tax-free withdrawals for Medicare insurance premiums. Withdrawals for non-qualified expenses are taxed at ordinary income tax rates and subject to a 20% penalty. Find out more on the IRS web site www.irs.gov
Morningstar provides an annual report on HSA plans. This report compares plan maintenance fees, interest rates, and quality of investments options. The 2022 report can be found on their web site https://www.morningstar.com/lp/hsa-landscape. HSA accounts with no fees, competitive interest rates, and quality investments received higher ratings than plans that were less consumer friendly.