Contributing to a Health Savings Account (HSA) is usually a financially smart move. In addition to helping you save for medical expenses that must be paid out-of-pocket before your high deductible health insurance plan (HDHP) coverage kicks in, HSAs offer a triple tax benefit:
- You can take a tax deduction for your HSA contributions.
- You don’t have to pay tax on any investment growth earned while the assets remain in the HSA.
- You won’t ever have to pay tax on your HSA contributions and investment earnings if you withdraw HSA assets to pay for qualified medical expenses.
If money is tight, it may be difficult to know whether you should prioritize saving for retirement or saving for medical expenses. Most financial planners recommend that you first contribute to your 401(k) plan to take full advantage of any employer match provided. After that, it may make sense to save in your HSA. You can use your HSA assets tax-free to pay for current medical expenses, but you can also wait and use your HSA to save for medical expenses in retirement. If you use HSA assets to pay for non-medical expenses after age 65, you will have to pay regular income tax on the HSA withdrawal (just like a 401(k) withdrawal) but there is no additional penalty tax.
Contributing to an HSA does not affect your eligibility to contribute to an IRA or employer-sponsored retirement plan, or to take advantage of all the tax benefits those contributions offer.
Annual Contributions
Some people fund their HSAs by having their employer withdraw an amount from each paycheck to deposit into their HSA. In this case, they may have to make an election before the beginning of the year regarding how much to defer into their HSA for the year. Some employers also contribute to an HSA on behalf of their employees. Other people have an HSA that is not tied to an employer and make contributions directly to their HSA custodian from their checking or savings account. HSA contributions for a tax year may be made up until the tax return deadline for the year (e.g., until April 15, 2019, for a 2018 contribution).
The maximum amount you may contribute each year depends on the type of HDHP coverage you have, your age, and how many months during the calendar year you are HSA-eligible. HSA contributions made by your employer also count towards your annual limit.
Contribution limit when you have family HDHP coverage for the full year
If you are eligible for 12 months of the year and have family coverage, you may contribute:
- $6,900 for 2018
- $7,000 for 2019
If you are age 55 or older, you may also make a catch-up contribution of $1,000 per year.
If both spouses have family coverage under separate HDHPs, one annual contribution limit applies for both spouses ($6,900 for 2018). If both spouses are 55 or older, however, each spouse may make a $1,000 catch-up contribution to his or her own HSA.
Contribution limit when you have self-only HDHP coverage for the full year
If you are eligible for 12 months of the year and have self-only coverage, you may contribute:
- $3,450 for 2018
- $3,500 for 2019
If you are age 55 or older, you may also make a catch-up contribution of $1,000 per year.
Contribution limit if you have HDHP coverage for part of the year
If you are HSA-eligible for only a portion of the year, your contribution limit is reduced by the number of months you were not HSA-eligible.
If you have self-only coverage from September 1, 2018 – December 31, 2018, you may contribute 4/12 of the $3,450 annual contribution limit, or $1,150 for 2018.
Excess Contributions
If you contribute more than the amount you are eligible to contribute, you will have an excess contribution. Excess contribution amounts are not deductible and must be corrected. If an excess contribution is not removed, a 6% excise tax applies for each year the excess remains in the HSA.
To learn more about Health Savings Accounts
Visit Mainstar Trust at mainstartrust.com and review our FAQs on HSAs.
Contact the Mainstar Trust team at 1-800-521-9897 or customerservice@mainstartrust.com.