What individuals should know
Wondering about the best strategy to fund your HSA this year? There isn’t a one-size-fits-all approaches to Health Savings Accounts, but here are a few things to consider.
First—what’s an HSA? Consumers with high deductible health plans are eligible to fund Health Savings Accounts. These savings accounts allow consumers to contribute funds tax-free to be used for qualified medical expenses. You never pay any taxes on funds used for medical expenses, and unused funds roll over every year. After age 65, you can continue to use the funds for medical expenses, or you can withdraw the funds for any use and pay only income taxes.
So how much should you contribute?
The short answer is as much as you can, up to the contribution limits. For 2018, individuals can contribute $3,450 and families can contribute $6,900. Consumers 55 years and older can contribute another $1,000.
Why would you want to max out your HSA? First, these tax-advantaged accounts are a smart place to save money. Like other retirement accounts, you never pay any taxes on saved funds, and you can invest surplus funds, which also aren’t taxed. After age 65, you can withdraw the funds and will pay only income taxes.
But unlike other retirement accounts, you can also use the funds completely tax-free to pay for medical expenses at any age.
Second, it’s likely that you will have a large medical expense at some point in your life. Whether it’s a pregnancy, surgery, accident or serious illness, getting in the habit of saving now for future medical expenses can reduce some of the cost pressure when and if you do wind up with a big medical bill.
What if I can’t afford to contribute $3,450 in 2018?
Anything is better than nothing. Further, if you have an HSA—even with just $20 in it—you can retroactively fund it and reimburse yourself in the event that you do have an expensive medical bill. But you can only do this if the account was opened before the medical experience.
For example, let’s say you have just $50 in your HSA when you have an accident resulting in $3,000 in medical bills. You obviously don’t have enough in the account to cover your bill tax-free.
You will have to pay the bill out-of-pocket, or with funds you’ve already paid taxes on. Whether you have the money at the time, or if you pay it through a payment plan, save all receipts.
Then, over time, re-fund your HSA via payroll contributions. When you have $3,000, you can reimburse yourself with tax-free funds. You can typically request a reimbursement from the HSA custodian, so check with your specific bank or HSA service.
For this reason, it’s worth opening an account if you are eligible for it, and funding as much as you can—even if it’s just a few dollars a month.
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