A health savings account (HSA) is a tax-advantaged way of saving for health care expenses now and in the future. The contributions you make to an HSA are income-tax-free, the growth and earnings are tax deferred (or tax-free), and the distributions are tax-free, provided they are used for a qualified health expense. A health savings account is also a portable account, meaning you own and control it, and there are no “use-it-or-lose-it” provisions. The funds you contribute to an HSA stay with you, and you can use the funds in the account whenever you want to, now or well into the future.
There are no income limits to meet in order to contribute to an HSA, so anyone who meets the eligibility requirements can contribute. You are eligible to contribute to an HSA if all of the following are true:
- You are enrolled in a qualified high-deductible health plan (HDHP)
- You are not covered under any other non-HDHP
- You are not covered under a traditional medical reimbursement account (MRA) or health care flexible spending account (FSA) through your or your spouse’s employer
- You are not enrolled in Medicare
- You cannot be claimed as a dependent on another taxpayer’s tax return
If you are eligible to contribute to an HSA, the IRS does place limits on how much you are able to contribute in a year. For 2020, you are allowed to contribute the following amounts depending on the type of insurance coverage you have:
- Single = $3,550
- Family = $7,100
- If you are age 55 or older, you are able to contribute an additional $1,000 to the above limits
In order to benefit from tax-free withdrawals from the HSA, the funds must be used for qualified health care expenses. Qualified expenses are eligible for yourself, your spouse, or your dependents. Examples of qualified health care expenses include:
- Most medical, dental, or vision expenses
- Copays and deductibles
- Prescription and non-prescription medicines
- Qualified long-term care insurance
Distributions from the HSA that are not qualified are subject to income tax and a 20% penalty. If you are age 65 or over, however, the 20% penalty does not apply.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. The opinions, estimates and projections constitute the judgment of Wilmington Trust and are subject to change without notice.