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Saving for current and future health care expenses has gotten a little easier thanks to Health Savings Accounts (HSAs). The benefits of an HSA include tax savings and the chance to invest your contributions in hopes of growing your assets. To open an HSA, you must meet a few qualifications.
In general, you can open an HSA only if you are under 65 and have an HSA-qualified health care plan. This plan can be held independently or through an employer. For 2015, the deductible (the amount you pay out of pocket before the insurance company covers costs) must be at least $1,300 for an individual or $2,600 for a family. HSA-qualified health care plans typically have lower premiums than other health care plans.
In conjunction with your HSA-qualified health care plan, an HSA allows you to set aside money on a tax-free basis. You can use the funds to pay the out-of-pocket health care costs your insurance doesn’t cover before or after you meet your deductible. Often, you can choose to contribute to your HSA with automatic payroll deductions each month or pay period.
Assuming you don’t spend all your contributions, HSA funds remain in your account from year to year, making the account a valuable long-term savings tool. You always own and control the money in your HSA, even if you change jobs or transition to a nonqualified health care plan. In 2015, the maximum amount that an individual can contribute annually to an HSA is $3,350. For families, the maximum is $6,650. If you’re 55 or older, you can make up to $1,000 in additional catch-up contributions annually.
Having a special savings account for health care expenses is particularly useful as you age. You can use HSA funds to cover long-term care premiums, Medicare premiums, and out-of-pocket expenses for a range of medical services — including the dentist and other specialists.
The funds you put into an HSA aren’t subject to federal income taxes or payroll taxes (Federal Insurance Contributions Act or Federal Unemployment Tax Act taxes, when contributions are made through your employer), and there are no taxes on withdrawals if you spend the money on qualifying health care expenses. Qualifying expenses can include anything from acupuncture to x-rays. These expenses may be incurred before or during your retirement, provided you have documentation of the expense.
Prior to age 65, you pay a 20% tax if you use HSA funds for nonmedical purposes or medical expenses that the IRS considers ineligible. After age 65, you can use the funds for any purpose, and that 20% excise tax doesn’t apply — only income taxes apply if the funds are used for ineligible expenses.
If you think an HSA might be right for you, find out if you can open one through your employer. You can also open an HSA through your bank or other financial institution.
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