1. How Health Savings Accounts Work
A Health Savings Account is a tax-favored savings account combined an insurance or healthshare plan. HSAs allow you to deposit tax-deductible funds into a savings account that you can use to cover medical costs.
To qualify you must have a high-deductible health insurance plan that qualifies to be partnered with an HSA. Money in the savings account can help pay the deductible. Once the deductible is met, the insurance starts paying. Money left in the savings account earns interest and is yours to keep.
2. Tax Deductible Contributions
Health savings accounts allow you to legally avoid federal income tax by saving up to $3,450 for singles or $6,900 for families in your HSA health plans account.*
You will receive a federal income tax deduction for money deposited, even if you take the standard deduction and don’t itemize your deductions. This tax deduction is available to everyone with no limitations on the amount.
A one-time roll-over from your IRA (Individual Retirement Account) or FSA (Flexible Spending Account) is allowed.
If your employer makes an HSA contribution for you, it is “excluded" from income and not subject to any income tax or FICA. Either way, this will immediately reduce your federal income tax due for the year.
* Individuals age 55 and over may deposit into their account (and take a tax deduction on) an additional catch-up contribution of $1,000.
3. Tax-Subsidized Medical Expenses
HSA Health Plans allow you to spend the money in your account tax-free on qualified medical expenses, even if you have already received a tax deduction from the amount.
This includes any fees from going to the doctor, purchasing prescription drugs, or paying expenses towards your deductible. Once your deductible is met, the health insurance covers your medical expenses as defined in the policy.
In addition to these benefits, you can use your HSA health plans account to cover other qualified expenses that would not normally be covered by a health insurance policy.
Also, your HSA health plans account can be used to pay these expenses for any spouse or dependent member of the family, including same sex and domestic partners, even if they are not covered under the insurance policy.
4. Premium and Tax Savings
Health Savings Accounts can help you save money on both your insurance premiums and your income taxes. Because HSAs must be paired with a high-deductible health plan, your health insurance premiums are normally much lower than a typical plan.
The savings from the lower premiums along with the tax-free deductions could be $5,000 or more every year. Below is an example comparing how much a typical non-HSA plan might cost compared to a typical HSA plan.
This example is based on the average health insurance premium of an individual with a family of four living in a metropolitan area, covered medical expenses totaling $1,500 and $550 in expenses for dental care, contacts and eyeglasses.
* Health insurance premiums vary substantially based on age, geographic location and other variables. Federal tax savings calculations assume that contributions are deducted from federal taxes. Withdrawals for nonqualified expenses prior to the age of Medicare eligibility are subject to a 20% penalty by the IRS. Most states allow for state tax deductions on Health Savings Accounts.
HSA for America and its affiliates are not engaged in rendering tax, investment, or legal advice. Federal and state tax regulations are subject to change. If tax, investment, or legal advice is required, seek the services of a licensed professional.
To calculate the future value of your own HSA, please use our HSA Future Value Calculator.
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