If you have a high-deductible health insurance plan and you’re not contributing the maximum to a health savings account (HSA), then you may be missing out. A study cited by The Washington Post found just one in 20 people with HSAs take full advantage of the opportunity.
In general, HSAs offer three tax benefits:
- Contributions are federally tax-deductible up to certain limits ($3,350 for a single person and $6,650 for a family in 2015; add $1,000 to those limits if you’re age 55 or older).
- Any interest earned on money in an HSA grows tax-deferred.
- Withdrawals used to pay qualified medical expenses are income tax-free.
Tax advantages aren’t the only reason to open an HSA. Money set aside in these accounts can be used to pay health insurance deductibles as well as qualified medical expenses. Although, according to The New York Times, determining which products can be purchased with HSA savings can be confusing:
“Under a change enacted with the Affordable Care Act, most over-the-counter drugs, like common allergy medications or pain relievers, are HSA-eligible only if you get a prescription for them from your doctor. On the other hand, items like sunscreen and contact lens solution are eligible for purchase – without a prescription – with your HSA funds.”
HSA assets also can be used to pay health insurance premiums (if workers are receiving unemployment benefits) and long-term care premiums.
It’s important to make sure HSA funds are used for qualified expenses because any money withdrawn for non-qualified expenses is taxed as ordinary income, plus a 20 percent penalty tax is assessed if the account holder is younger than age 65.
That brings us to another advantage provided by HSAs. Kiplinger.com explained money not spent during the contribution year remains in the account. Any earnings grow tax-deferred and the savings that accumulate may be used for qualified medical expenses in the future or, once the account holder reaches age 65, for living expenses. In the latter case, withdrawals may be taxed as ordinary income.
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