A health savings account (HSA) is a type of tax-deferred savings account that gives you a tax break on out-of-pocket medical expenses. The plan is only available to individuals and families who have high deductible health plan – a type of insurance that requires you to pay a lot of money out of pocket before the insurance kicks in and pays anything. These high deductible health plans typically have lower monthly premiums, which makes them attractive for self-employed people like us freelance writers and also for young, healthy people who don’t need comprehensive health coverage.
Income, Contribution Limits, Withdrawals
To open an HSA, you must be under age 65 and have a high deductible health plan with a minimum deductible of $1,200 for individual plan or $2,400 for family plan. Your maximum out-of-pocket expense limit for that plan should not exceed $5,950 for an individual plan or $11,900 for a family plan. Your HSA contributions are capped at $3,050 each year for an individual plan or $6,150 for a family plan.
You can generally contribute the maximum as long as you’re covered by December 1 of the tax year, but you need to remain under your high deductible plan until December 31 of the next year. Otherwise, you’ll be subject to an excess contribution tax.
The IRS, and maybe even your bank, will penalize you for making excess contributions to your HSA, so it’s important to make sure you only contribute what you’re allowed. (These are the limits for 2011. Minimum deductible and maximum contribution limits are subject to change every year.)
You don’t have to use up your HSA balance by the end of the year. Instead, you can rollover the balance in your HSA from year to year and continue making contributions.
Most plan administrators give you a debit card that you can use to pay for your out-of-pocket medical expenses. But, if you use your money for non-medical expenses before you turn 65, you’ll have to pay a 20% early withdrawal penalty and include the withdrawal in your taxable income. On the other hand, if you withdraw the money after 65 and don’t use it for medical expenses, you won’t have to pay the 20% penalty, but you will have to pay taxes on it.
One of the benefits of contributing to an HSA is that you can take an above-the-line tax deduction for your contribution. This means you pay no tax on the money you put in an HSA and you don’t have to itemize to take the deduction. The money remains untaxed when you withdraw from your HSA to cover medical or dental expenses.
There are no income limits for HSA so you can contribute and take the tax deduction no matter how much money you make (or don’t make) as long as your insurance plan meets IRS guidelines.
Who Can't Open an HSA?
Unfortunately, you can’t take advantage of the HSA if you have other medical insurance, including coverage under your spouse’s policy or Medicare. You are also unable to contribute if you use an employer’s flexible spending account. You can, however, continue to use your HSA to pay for medical expenses like co-pays even if you decide to return to the workforce.