A Health Savings Account may help you save on taxes while socking away money for medical expenses, but it’s not the right bandage for every family’s budget.
First off, you have to be eligible. We’ll explain what that means in a minute. If you are eligible, there’s still time to apply an HSA’s therapeutic deduction to your 2014 tax return as well as setting yourself up for 2015.
Here’s how it works: Money you contribute to your HSA established at a bank or brokerage goes in tax-free, earns interest tax-free and may be withdrawn tax-free anytime if you use it for medical expenses — kids’ braces now or even Medicare premiums after retirement.
That could mean up to a 30 percent savings in taxes on the contributions, says Wells Fargo.
Once established, the account is yours and goes with you when you change jobs. In some ways, it’s like a 401(k) or IRA for medical bills; it also has characteristics of a Flexible Spending Account (FSA), but without the use-it-or-lose-it gamble.
HSAs and high-deductible health insurance plans were launched in 2004 to help control health care costs, says the Mayo Clinic in Rochester, Minnesota.
“The idea is that people will spend their health care dollars more wisely if they’re using their own money. In addition, doctors and other health care providers will have an incentive to lower their rates because they’re competing for business,” Mayo says.
Are you eligible?
Only a worker younger than 65 with a qualifying “high-deductible health plan” (HDHP) and no other health insurance to draw on may establish an HSA, says the Treasury Department. If you’re older than 65, you can draw on your existing HSA, but you’ll pay a penalty if you contribute to it while on Medicare.
By the numbers
For 2015, the HDHP’s annual deductible must be at least $1,300 for individuals and $2,600 for families. Its out-of-pocket maximum cannot be more than $6,450 for individuals and $12,900 for families. Your maximum contribution to the account is $3,350 for an individual, $6,650 for a family.
For 2014, the deductible was $1,250 for individuals, $2,500 for families; out-of-pocket maximums were $6,350 individual, $12,700 families. You have until tax filing deadline of April 15 to establish an HSA and contribute up to $3,300 for an individual or $6,650 for a family and reflect a reduction in salary on your income tax return. (If you had a qualifying plan for only part of the year, your contribution limit will be lower.)
For either year, catch-up contributions of $1,000 are available for those age 55 and older.
About 21 percent of workers are covered by high-deductible health plans, according to the Bureau of Labor Statistics. Employees at the nation’s smallest firms, with one to 100 workers, are more than twice as likely to be covered by high-deductible health plans those in the largest companies, with more than 100 workers, the BLS estimates.