Health Savings Accounts (HSAs) are tax-advantaged individual savings accounts designed specifically to pay for the medical expenses of individuals who are enrolled in high-deductible health plans (HDHPs).
As long as HSA funds are used to pay for qualified medical expenses, account owners will not pay income tax on the amount withdrawn.
The funds in these accounts are similar to any normal investment account, with the account owner fully owning all contributions, even if they are made by an employer, and being able to invest the funds into various investment options the financial custodian offers, which will typically be a range of mutual or index funds.
If you don't have an HSA yet, check out our list of the Best Places To Open An HSA Account.
High Deductible Health Plans
High-deductible health plans offer lower premiums than traditional health insurance plans, with the trade-off being much higher deductibles (the amount that the insured person must pay before the insurance company will begin covering part or all of the cost of the medical treatment or item) than traditional health insurance plans.
For 2020, the minimum health plan deductible to qualify as an HDHP is $1,400 for single tax filers and $2,800 for joint tax filers ($1,350 and $2,700, respectively, for 2019). The other requirement is the maximum out-of-pocket expenses the plan allows, which for 2020 is $6,900 for single filers and $13,800 for joint filers ($6,750 and $13,500, respectively, for 2019).
These limits apply to the plan's in-network costs; there are no specific limits defined for out-of-network costs and coverage.
The Triple Tax Advantage Of HSAs
Contributions to HSAs are tax-advantaged at three levels:
1.) The amount of the contribution is tax-deferred, meaning it is deducted as an adjustment on page one of the account owner’s income tax return and not subject to income tax until it is withdrawn
2) Withdrawals used for qualified medical expenses are never taxed,
3) Investment gains within the account are also never taxed, as long as they are also used for qualified medical expenses.
These are three powerful benefits that exceed the advantages offered by many other tax-advantaged accounts.
These tax advantages are why we call the HSA the Secret IRA!
2019 HSA Contribution Limits
Last year, the IRS announced the limits for 2019 were going up! That's a huge win for savers!
Contribution Type | 2019 Contribution Limit |
|---|---|
Employer + Employee | Self-Only: $3,500 Family: $7,000 |
Catch up contribution (Age 55 and up) | $1,000 |
There are no income limits to be eligible to contribute to an HSA although you do need to enroll through your employer and have a high-deductible health insurance plan in order to qualify.
Also, remember you can contribute to your 2019 HSA all the way until April 15, 2020 - the tax deadline. So, if you still have some room in your account, top it up and save on taxes (and save for yourself too)!
2020 HSA Contribution Limits
The IRS announced on May 28, 2019 that they are increasing the HSA contribution limits again.
Contribution Type | 2020 Contribution Limit |
|---|---|
Employer + Employee | Self-Only: $3,550 Family: $7,100 |
Catch up contribution (Age 55 and up) | $1,000 |
There are no income limits to be eligible to contribute to an HSA although you do need to enroll through your employer and have a high-deductible health insurance plan in order to qualify.
Contributions are also 100% tax deductible at all income levels.
Final Thoughts
For those who are already using an HDHP and expect to have a significant amount of qualified medical expenses, the benefits of avoiding income tax on these expenses far outweighs to effort to set up an HSA and incur the annual management fees that the financial custodian may charge.
Combined with the fact that there are no income limits or phase-outs to qualifying for HSAs, this can be a valuable tax-advantaged strategy for anyone with an HDHP.
Are you eligible to contribute to an HSA? If so, are you taking advantage of the triple tax advantage?
Jeff Maudlin says
My wife and I have an HSA through her employer. We haven’t funded it this year because we are confused regarding our eligibility.
I turned 65 this past October and began Medicare.
My wife will turn 65 in March of this year.
Are we able to contribute the whole $7900 for 2018 or are we only able to contribute a pro-rated amount based on when I went on Medicare?
Robert Farrington says
To confirm, you are enrolled in Medicare for 2018, and your wife has an HSA eligible plan for 2018? If so, then Yes, if he is otherwise HSA-eligible. Individuals don’t have to be the medical plan subscriber to be HSA-eligible. You or your spouse can then make tax-deductible contributions into his HSA, up to the family maximum if you remain covered on a family contract (even if only he is HSA eligible). For some couples, this provision in the law allows them to continue to contribute to an HSA (and build tax-free balances for distribution in retirement) for several years after the older spouse enrolls in Medicare.
Next year, just because your wife turns 65 doesn’t change anything. If she continues on her employers plan, and remains HSA eligible (for example, doesn’t enroll in Medicare), then the same rules apply.
Richard Rummage says
Twice in your article you make the following statement: “There are no income limits to be eligible to contribute to an HSA although you do need to enroll through your employer and have a high-deductible health insurance plan in order to qualify.”
I do not have an employer – am I not allowed to establish an HSA if I am otherwise qualified (i.e. have an HDHP)?
Robert Farrington says
A better way to state is is having a qualifying high-deductible health insurance plan. If you’re self employed and have a qualifying plan (or unemployed and have a qualifying plan), you can still open an HSA.
Check out this list to find places outside an employer: https://thecollegeinvestor.com/22222/best-hsa/
Vismay says
We were on my wife’s HDHP for 3 months (March – April – May) in 2018 during which we contributed in total $300 and her employer contributed $250 in total to HSA(total HSA balance is $550).
Then as I got a new job we changed it to my employer Health plan which is a regular health plan and we also have FSA of total $750 (For which my employer is deducting from my every paycheck.)
We wish to contribute additional $1000.00 to HSA for 2018 to use in time of need in future (with understanding that for 3 months of HSA we can contribute in total up to approximately $1600.00)
Question – Can we contribute this amount to HSA account for 2018 to take most advantage of HSA now in March 2019 that we have a regular health plan (with FSA)?
Robert Farrington says
If you only had partial year eligibility, you must pro-rate the amount of your contribution. Assuming you were on a family plan (since it was your wife’s), your contribution max is limited to 3/12 * $6,900 = $1,725 for the year.
Since you were only at $550 contributed, you can contribute another $1,175 into your account all the way until April 15 – just like an IRA. Just make sure you mark your contribution as 2018.
Suzanne says
I am filing 2018 taxes jointly with my husband. We have individual HDHP, mine is for an individual and his covers him and his 2 kids which we do not claim on taxes. Based on this can I contribute $3450 to my HSA and can he contribute $6900? Or do we fall into complying with the overall maximum of $7000?
Robert Farrington says
For 2018, the maximum you could have contributed as an entire family is $6,900.
Brad Comer says
I have a HDHP at work that covers myself and my son. My wife has a HDHP at her employer. Are we limited to one family deduction ($7,000), or can I contribute the family amount while she separately contributes the single amount ($3,500), for a total of $10,500?
Robert Farrington says
You are limited to $7,000 no matter how you split it. You could each do $3,500, or $7,000 into one account. And be careful if either of your employers contributes, as that counts towards the limit as well.
Mike Webster says
I was told I could contribute to an HSA and pay for my medical expenses myself without using the HSA balance but save a receipt for the expenses for later use. Then, after 20 years of medical expenses I self paid for, I could submit the 20 years of saved receipts to essentially use my HSA balance as income without having to count it toward my taxable income. Can you please verify if this is accurate, or point me in the right direction to get more details about what this person may have been trying to tell me?
Robert Farrington says
That’s correct. You can’t go backwards for expenses when you didn’t have an eligible plan, but you can always reimburse in the future. We call the HSA the “secret IRA” for this reason. Read more here: https://thecollegeinvestor.com/17565/hsa-secret-ira/
Brenda says
Our young adult daughter is on our family insurance HDHP, but since she is no longer our tax dependent, my understanding is that she can open her own HSA since we can no longer use ours to pay for her medical expenses. My question is what is the maximum that she is eligible to contribute to her HSA? Since she is on a family plan, can she contribute the $7000, or is she restricted to the single amount of $3500?
Robert Farrington says
If you adult daughter is on a qualifying HDHP that is a family plan, she can open her own HSA and contribute up to the family maximum. Note – you could also help her fund her HSA up to the family maximum.
This is the perfect sweet spot. I would actually recommend you fully fund her HSA and treat it like an IRA – never taking money out. You could really set her up for financial success.