Overview and Purpose of an HSA
A Health Savings Account (HSA) is a special type of savings account that offers unique tax benefits to help individuals with high-deductible health plans (HDHPs) cover medical expenses. Authorized by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, HSAs aim to empower consumers to manage healthcare costs while encouraging saving for future needs.
Eligibility Requirements
To open and contribute to an HSA, you must meet these criteria:
- Be covered by a qualified high-deductible health plan (HDHP).
- Have no other health coverage except permitted types such as dental, vision, or specific injury insurance.
- Not be enrolled in Medicare.
- Not be claimed as a dependent on another person’s tax return.
Contribution Limits for 2024
The IRS sets annual contribution limits that change yearly. For 2024, the limits are:
- $4,150 for individuals with self-only HDHP coverage.
- $8,300 for families covered under an HDHP.
- An additional $1,000 catch-up contribution is allowed if you are age 55 or older.
Key Tax Advantages
HSAs provide a triple tax benefit:
- Contributions are tax-deductible or pre-tax if contributed via payroll deductions.
- Earnings grow tax-free on investments held within the account.
- Qualifying withdrawals are tax-free when used for eligible medical expenses.
These advantages differentiate HSAs from other accounts like Flexible Spending Accounts (FSAs), which often have a “use-it-or-lose-it” policy.
Qualified Medical Expenses
You can use your HSA funds tax-free for a broad range of qualified medical expenses, including:
- Doctor visits and hospital services
- Prescription medications
- Dental treatments and orthodontics
- Vision care, such as glasses and contact lenses
- Certain over-the-counter medications and menstrual care products with a prescription
- Medical equipment like crutches or blood sugar monitors
Refer to IRS Publication 502 for a comprehensive list of qualified expenses.
Using HSA Funds
Withdrawals for qualified medical costs are tax-free at any time. If you use funds for non-medical expenses before age 65, the amount is subject to income tax plus a 20% penalty. After age 65, withdrawals for non-medical expenses are taxed as income but avoid the penalty.
Investment Opportunities and Growth
Many HSA providers allow account holders to invest funds in mutual funds, stocks, or bonds once a minimum cash balance is reached, allowing your savings to grow faster over time, similar to retirement accounts.
Long-Term Benefits and Retirement Planning
An HSA can serve as a long-term healthcare savings tool, especially valuable for retirement planning. Unlike FSAs, unused HSA funds roll over year after year indefinitely, continuing to grow tax-free. After age 65, the HSA can be used like a traditional IRA for any purpose without penalty, though non-medical withdrawals are taxed as ordinary income.
Common Pitfalls and Tips
- Keep all receipts and records for HSA withdrawals, as the IRS may require proof the funds were used for qualified medical expenses.
- Don’t over-contribute beyond the IRS limits to avoid penalties.
- Coordinate with other accounts like FSAs and Medicare to maintain eligibility.
Frequently Asked Questions
Can I contribute to an HSA if I have Medicare? No, Medicare enrollees cannot contribute but can use existing funds.
Are over-the-counter medications eligible without a prescription? Only those prescribed by a healthcare provider qualify.
Can I have both an HSA and a general-purpose FSA? Generally no, but you may have a limited-purpose FSA for dental and vision.
What tax forms are related to HSAs? Form 8889 is used to report HSA contributions and distributions on your tax return.
Contribution Limits Table for 2024
| Coverage Type | Contribution Limit | Catch-Up Contribution (55+) |
|---|---|---|
| Individual Coverage | $4,150 | $1,000 |
| Family Coverage | $8,300 | $1,000 |
Additional Resources
- IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans
- FinHelp.io glossary on Health Savings Account (HSA) Deduction
- FinHelp.io glossary on Form 8889 – Health Savings Accounts (HSAs)
Whether you’re focused on reducing healthcare expenses today or preparing for medical costs in retirement, an HSA offers a powerful, tax-efficient way to save. Understanding how it works and complying with IRS rules helps you maximize the benefits of this financial tool.