The tax advantages provided by Health Savings Accounts (HSAs) may be unknown to many individuals. Despite not being as popular as long-term savings plans like IRAs and 401(k)s, understanding the rules and regulations surrounding HSAs can help individuals make the most of these accounts.
Contributions to HSAs are tax-free, and the funds can also be invested for potential growth. Any investment gains within an HSA are also tax-free as long as the withdrawals are used for qualifying medical expenses. However, there are penalties for withdrawing funds for non-medical purposes.
Whether you’re new to saving in an HSA or need a refresher, it’s important to know the ins and outs of how these accounts work.
Here are three key rules to keep in mind:
1. Employer contributions count towards your annual limit:
Similar to IRAs and 401(k) plans, HSAs have yearly contribution limits. Employer contributions to your HSA count towards these limits. This differs from 401(k) plans, where annual limits are not affected by employer matching incentives. It’s crucial to be aware of this when planning how much you can contribute to your HSA each year.
2. Catch-up contributions begin at 55:
Just like retirement accounts such as IRAs and 401(k)s, HSAs allow for catch-up contributions. However, unlike IRAs and 401(k)s, which allow catch-up contributions starting at age 50, HSA catch-up contributions begin at age 55. Individuals can contribute an additional $1,000 to their HSA as a catch-up contribution, regardless of whether they have self-only or family coverage.
3. Penalty-free withdrawals at age 65:
While non-medical withdrawals from an HSA can incur penalties, once you reach age 65, you have the freedom to withdraw funds for any reason without penalties. However, keep in mind that non-medical withdrawals after this age will be subject to taxation. It’s wise to fund your HSA generously to maximize its potential benefits, even if you end up with more funds than needed for healthcare expenses in retirement.
In order to make informed decisions regarding your HSA, you must understand these rules and regulations. By taking advantage of the tax benefits and planning wisely, individuals can make the most of their health savings accounts.