Health savings accounts are tax-advantaged medical savings accounts available to people enrolled in high-deductible health plans (plans with deductibles of at least $1,350 for individuals and $2,700 for families). To qualify for a health savings account, your plan also needs to meet an out-of-pocket maximum below specified thresholds. In 2019, the out-of-pocket maximum for an HSA-qualified health plan must be less than $6,750 for individual coverage or $13,500 for family coverage.
Money contributed to a health savings account is not subject to federal income tax at the time it is deposited. For 2019, people with individual medical coverage can deposit up to $3,500 in a health savings account while people with family plans can deposit up to $7,000. If you are age 55 and older, you can contribute an additional $1,000 to your account.
In addition to being an excellent way to cover out-of-pocket medical expenses, health savings accounts provide a number of other advantages. For example, if the money in a health savings account is not withdrawn to cover medical expenses or put to other uses, it can accumulate and grow from one year to the next. That is, unlike flexible spending accounts for medical and dependent care expenses, health savings accounts don’t have to be emptied each year.
If money in a health savings account is indeed used to pay medical expenses, the withdrawal is tax-free. If the money in the account is used for other purposes, there is a 20 percent penalty—but not if the holder of the account is 65 years of age or older. By providing attractive saving and spending options, health savings accounts are particularly useful for retirees. In addition, holders of health savings accounts do not have to begin withdrawing money in “mandatory minimum distributions” when they turn 70½. Money can be left in the account for as long as the holder likes. In this way, health savings accounts can be used to augment other savings. Some advisors even go so far as to say that in certain cases, health savings accounts should be given higher priority than IRAs as a means of saving for retirement, in part because withdrawals for medical expenses are tax-free.
Of course, as with any retirement account, getting the maximum return on contributions depends on choosing the right investments. It is also important to note that health savings accounts cannot be opened independently if a person already has other medical coverage or is enrolled in Medicare. However, if you are eligible to open one, and can afford to make contributions to it, a health savings account can be extremely helpful after retirement.
