Health savings accounts are tax-advantaged accounts used to pay for medical expenses. Anyone who pays a high deductible health plan in the United States can contribute funds to an HSA. These funds are not taxed at the time of deposit. The funds can be withdrawn and transferred to another HSA. However, they are not tax-free. Expenses incurred before you set up your HSA are not deductible.
Expenses incurred before you establish an HSA aren’t considered qualified medical expenses
The IRS maintains a list of qualified medical expenses that you can deduct from your income. However, not all expenses are considered qualified medical expenses. Non-prescription medicines, such as insulin, do not qualify. Expenses incurred before you establish your HSA do not count. The last-month rule does apply: you may be able to use HSA funds for medical expenses before your tax year ends.
Health savings accounts, or HSAs, are designed to help people save money for qualified medical expenses. They allow you to save money pre-tax and earn interest. You can withdraw these funds tax-free for a specified period of time, and you can defer them indefinitely without penalties. The amount of money you contribute to an HSA is tax-deductible and FDIC-insured.
A minimum deductible of $1,400 for individuals and $2,800 for families is required. If you self-insure, your HSA plan must have a $7,050 limit. Any additional qualified medical expenses are split between you and the plan. Typically, your insurer pays 80 percent to 90% of your qualified expenses, while you pay the remaining 10% to 20% as a copay.
Contributions to an HSA must be included in income
The amount of tax-free money you can invest in an HSA is entirely up to you. If you are an employer, you can contribute as much as you can afford to deduct. You may contribute up to $2,500 a year, but you must remember that excess contributions are not deductible. Generally, any contributions over $500 must be included in your gross income. That means that a $100 excess contribution would be taxed at six percent, and a $1,000 excess contribution would be subject to a 60-percent penalty.
If you fail to meet the qualifications for continuing HSA eligibility, you must reclaim the money you contributed and pay 10% additional tax. This amount is not deductible, but can be included in your income as an HSA distribution if you qualify for it. The amount of tax you owe on non-qualifying contributions is determined by the amount of the HSA account that is non-deductible.
The amount you can contribute to an HSA varies depending on your age, your current health plan, and your employer. You can contribute up to $3,600 if you’re 65 or older and up to $7,200 if you’re a family of four. If you’re over 55 and have health insurance, you can also make a catch-up contribution of $1,000 per year. The contribution limit is subject to adjustment for inflation every year.
Funds in an HSA can be transferred to another HSA
Investing in an HSA is like having your own personal retirement account. You can invest in stocks, bonds, exchange-traded funds, and mutual funds to grow your portfolio for decades to come. The good news is that you can transfer funds from one HSA to another without penalty. As long as you use the funds for qualified medical expenses, the money rolls over from year to year. Also, you can transfer unused funds to another HSA at any time.
To transfer funds to a different HSA, you must contact the investment provider that manages your account. Some HSA providers allow in-kind transfers, which involves the transfer of an entire investment portfolio. However, some institutions do not allow in-kind transfers. In such cases, liquidated investments can be transferred to a new HSA account. However, you should consider if the transfer is a good idea for your situation.
Once you’ve decided to switch jobs or change jobs, you can transfer your HSA account to another provider. If your new employer offers an HSA plan with a better provider, you should use this option. Otherwise, you can contact your current provider and request a trustee-to-trustee transfer. Alternatively, you can request a check and rollover your funds. However, remember that you must deposit the funds into the new account within 60 days of changing jobs.