A health savings account (HSA) is a savings vehicle established to set aside funds tax free to pay for health care expenses. HSAs allow individuals who have high-deductible health plans (HDHPs) to save money for health-care expenses tax free. One of the advantages of HSAs is that unlike FSAs, funds remaining in your account at the end of the year are not forfeited. There is no "use it or lose it" provision. Moreover, the funds are portable and can be used through your retirement years.
Generally, if you are covered under an HDHP, you are eligible to establish an HSA. You will not be eligible to open an HSA, even if you are covered under an HDHP, if any of the following apply: 1. You are already covered under a non-HDHP, including a comprehensive major medical plan, a plan sponsored by your employer or your spouse's employer, or a prescription drug plan or rider with a low deductible or no deductible. (Some plans such as dental or vision care insurance, long-term care insurance, disability insurance, and accident insurance are exempted.) 2. You can be claimed as a dependent on another person's income tax return. 3. You have enrolled in Medicare. If your spouse has non-HDHP family coverage, but that plan does not cover you, you may still contribute to an HSA if you are otherwise eligible to do so. However, your spouse will not be eligible to contribute to an HSA.
How do you establish an HSA and make contributions?
An HSA is a tax-exempt trust or custodial account. You can open an HSA on your own or through your employer if they offer HSAs as part of a cafeteria plan. Contributions may be made by you or your employer directly or through salary reduction under a cafeteria plan (if available). However, no contributions can be made to your HSA once you retire. For tax year 2014, you can contribute up to $3,300 for individual coverage or $6,550 for family coverage, indexed annually for inflation. You and your spouse may also be eligible to make additional "catch-up contributions" of $1,000/each to your HSA if you are 55 or older. However, no regular or catch-up contributions can be made once you reach age 65 and are enrolled in Medicare. Contributions may be made monthly or as a lump-sum any time before your tax return becomes due.
What are the tax benefits? In effect, an HSA provides a triple-tax advantage… (1) Individual contributions you make to your HSA that do not exceed the maximum contribution limit are tax deductible on your federal income tax return; even if you don't itemize. (2) You can direct your contributions to a savings or investment option offered by the qualified trustee or custodian and any interest or investment earnings on those contributions grow tax deferred until withdrawn. (3) Distributions will be tax free when withdrawn to pay qualified medical expenses for yourself, spouse or qualified dependents. Distributions for non-qualified expenses are considered taxable income and are subject to an additional 20 percent penalty tax. No penalty applies if a non-qualified distribution occurs after age 65 or the death or disability of the beneficiary.
What are qualified medical expenses? Qualified medical expenses are health-care expenses, as defined by Internal Revenue Code 213(d), which are paid by you, your spouse, or your dependents. These include laboratory fees, prescription and nonprescription drugs, dental treatment, ambulance service, eyeglasses, and hearing aids, as well as many other health care expenses. Health insurance premiums are not covered except for the following: (1) COBRA coverage, (2) Qualified long-term care insurance, (3) Health coverage maintained while receiving unemployment compensation and (4) Retiree health insurance other than a Medicare supplemental policy (Medigap). Over-the-counter (OTC) medications are no longer considered a qualified medical expense however, OTC medicines and insulin prescribed by a physician will still be considered qualifying expenses.
Last thing… Funds remaining in your HSA upon your death become the property of your designated beneficiary. It remains an HSA if the beneficiary is your spouse otherwise a full distribution is made to all other beneficiaries.
*Commonwealth Financial Network® and Blakely Financial, Inc. does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation
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