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Introduction

Retirement accounts are the most commonly used tax sheltered accounts. Another less commonly known savings tool is an HSA (Health Savings Account). HSAs are individual accounts offered by employers in combination with a high-deductible health plan (HDHP). The advantages of an HSA are:

1. The money saved is on a pre-tax basis;
2. There are no taxes due on the investment growth;
3. Withdrawals for qualified medical expenses are never subject to income tax;
4. After age 65, an HSA essentially transforms into an IRA.

What is an HSA?

Created as part of the Medicare reform in 2003, HSAs were designed to give adults covered by HDHPs the ability to establish tax-advantaged savings accounts to use for qualified medical expenses. *HSA contributors must be covered by a qualified HDHP and must not be covered by any other health plan.

High-deductible health insurance plans are defined as:

• A deductible that is more than $1,250 for self-only coverage or $2,500 for family coverage,
• The annual out-of-pocket expenses (deductibles, co-payments) which exceed $6,350 for self only and $12,700 for family.

Regardless of age, anyone can set up an HSA and contribute yearly as long as the participant has a qualified HDHP and is not enrolled in Medicare.

How much can be contributed?

Employees use pretax dollars to make contributions to HSAs. The IRS maximum annual contribution limit for HSAs in 2015 is $3,350 for people with individual health plans, and $6,650 for those with family health plans.

*Health plans must be HSA approved. Depending on the size of the company, setup, admin and annual costs apply.