The rising cost of healthcare has contributed to the growing popularity of health savings accounts (HSAs). An HSA is a tax-favored account that can be used to pay out-of-pocket medical expenses.
To be eligible for an HSA, an individual must be covered under a high deductible health plan, either personally or through an employer. The plan must have certain provisions, including a specified minimum annual deductible and a dollar cap on the expenses required to be paid out of pocket for covered benefits. Additional health coverage is generally prohibited, although there are certain exceptions.
From a federal income-tax standpoint, an HSA offers several benefits.
- Within limits, HSA contributions are tax-deductible (or pretax under an employer’s cafeteria plan).
- Earnings on HSA investments accumulate tax-deferred.
- HSA withdrawals used to pay qualified medical expenses are tax-free.
Withdrawals not used for qualified expenses are taxable, and a 20% penalty also may apply. Any unspent HSA funds can simply accumulate in the account for future use.
To learn more about tax rules and regulations health savings accounts, give us a call today. Our knowledgeable and trained staff is here to help.
Individuals age 55 or older as of the last day of the year who aren’t enrolled in Medicare may make additional “catch-up” contributions of up to $1,000 annually.