Contributions you can make
Employees and employers can contribute to an HSA. For 2019, the combined contribution limit (employee plus employer) is $3,500 for an individual. For family accounts, the limit is $7,000. A person age 55 or over can make an additional catch-up contribution of $1,000 if they will turn 55 by the end of the year.
Tax implications for the present
Any money you put into your HSA reduces your federal taxable income by that amount, and in most cases, your state taxable income, too. Notice, this does not amount to one-for-one tax savings. When you put in $1,000, you do not reduce your taxes by $1,000. You reduce your taxable income by that much. So, if you were in a 25% tax bracket, you would save 25% of $1,000, or $250 off your taxes. People in higher tax brackets save even more.
Tax implications for the future
When you incur medical expenses, you can withdraw money to pay for them from your HSA tax-free. This is much different from an IRA, where you contribute money tax-free but pay taxes when you withdraw it. This is what makes HSAs attractive for retirement planning.
One advantage of the HSA is that there is no time limit for getting reimbursed for eligible expenses. For example, once you have an HSA, you could incur an expense now and get reimbursed for it 10 years from now (as long as you have proof of the eligible expense).
HSAs can help offset eligible health expenses while lowering taxes.
You won't have to use taxable withdrawals from your IRA for health expenses, because you can withdraw money tax-free from your HSA to be reimbursed for eligible medical expenses. This amounts to free healthcare in your retirement years.
You can generally be reimbursed for medical, dental, vision and prescription drug expenses, like copays, deductibles and coinsurance.
Tax implications for investing
You can invest your HSA funds, just like you can for an IRA. Your HSA investments grow tax-free. This results in triple tax savings. You save on taxes once when you contribute, you save taxes on your investments, and you save taxes when you withdraw the funds to be reimbursed for eligible medical expenses.
Using an HSA with Medicare
When you enroll in Medicare, you must stop making contributions to your HSA. However, you can still withdraw money from your HSA for qualified medical expenses that Medicare doesn't cover. As long as the money is used for qualified expenses, you do not have to pay taxes on it.
If you reach retirement age and are still working, you can delay your Medicare enrollment so you can continue to contribute to your HSA. However, you will have to also delay collecting Social Security benefits, because when you start your benefits, you are automatically enrolled in Medicare. You can't decline your Medicare Part A benefits while you are collecting Social Security benefits.
Penalties and tax liabilities
Stop contributing to your HSA six months before you enroll in Medicaid, because it will cover you retroactively for those six months. You could be subject to taxes.
If you withdraw HSA funds for non-medical expenses before you are 65, you will pay income tax on the withdrawal and an additional 20% penalty.
If you use HSA funds for non-medical expenses after age 65, you will pay income tax on the withdrawal. However, you will not pay an additional penalty.
What happens to HSA funds upon death
You can pass your HSA money to your heirs. How it is taxed will depend on if you use a will or a trust.
Additional health plans you can have
You cannot have any other health care coverage besides your company health plan if you want to qualify to contribute to an HSA, except for the following:
- You can carry coverage for a specified illness.
- You can have coverage that pays a set amount per day of hospitalization.
- You can have coverage for accidents, disability, dental and vision care, and long-term care.
- You can have coverage for worker's compensation liabilities, or property ownership liabilities.
Keep in mind that if you contribute to a health care Flexible Spending Account (FSA), you might not qualify to also contribute to an HSA. That’s because a health care FSA is considered other health coverage.
Reporting on your tax return
If you contribute to an HSA or you withdraw amounts from an HSA, you may need to report this activity on a special form (Form 8889) with your federal income tax return. You may also need to keep proof of the expenses that you use your HSA in case you get audited. Please consult your tax advisor concerning your particular circumstances.