Recently, I wanted to figure out how I could start contributing to an HSA. Health Savings Accounts (HSAs) are getting a lot of attention in the personal finance world. In case you haven’t heard of them, HSAs are special investment accounts in the U.S. that let you save money for medical expenses tax-free. This means you get a tax break upfront, just like with your retirement accounts.
For years, we’ve been using an FSA (Flexible Spending Account) to save tax-advantaged funds for medical expenses. However, FSAs have a “use it or lose it” policy, which means you could lose your savings if you don’t use them within a certain time frame. This can be tricky to manage.
If you’re aiming for early retirement, HSAs offer unique tax advantages that make them even more attractive. Here’s what I learned about contributing to an HSA, which might help you see if it’s a good fit for you too.
HSAs have several great benefits, especially if you’re planning to retire early. They offer three major tax advantages:
1. No taxes when you make contributions.
2. No taxes while the money grows.
3. No taxes on withdrawals, as long as they’re for medical expenses.
To see if you qualify for an HSA, you need to check the rules in IRS Publication 969. Unfortunately, the requirement for a High Deductible Health Plan (HDHP) disqualified me because our medical deductibles are $1,500 per person and $3,000 per family. The IRS family minimum is $2,600, which means my plan doesn’t meet the HDHP criteria.
Switching to a plan with a higher deductible to qualify for an HSA might not be wise. Although some people opt for higher deductible plans to lower their paycheck deductions, this could backfire if you face medical issues. You’d end up paying more out-of-pocket up to your deductible amount. Even with HSA tax savings, money out of your pocket is still a loss. A lower deductible plan might cost more per paycheck but could save you thousands in the long run.
If you do qualify for an HSA and want to contribute, here are your options for 2017. The maximum allowable contribution for 2017 is:
Remember, unlike FSAs, HSAs are not a “use it or lose it” system. Any unused money rolls over to the next year and can earn interest. Additionally, like a 401(k) or IRA, HSAs can save you money on taxes. Estimating a 25% tax rate, the tax savings can be significant.
You can’t contribute to an FSA for medical expenses if you have an HSA. However, your employer might offer a Limited-Purpose FSA that can be used for dental and vision expenses.
