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How to Take Full Advantage of Your Health Savings Account in 2014

In order to understand the benefits of an HSA, it’s important to learn that these tax-deferred accounts work hand-in-glove with high-deductible health plans.
Wednesday, 20 November 2013

health savings accountIn this season of open enrollment, you may have noticed that employers are starting to push the "High Deductible Health Plan with Health Savings Account" a little more vigorously.

Some companies are even offering a donation to the employee's Health Savings Account (HSA) as an incentive to sign up. If your company has jumped on this bandwagon, take heart. It's really not so bad to be offered this type of plan, but only if you take complete advantage of the tax savings of an HSA.

According to an article on Forbes.com, "How To Get The Most Out Of Your Health Savings Account," the benefits of HSAs are many. Of course, this type of plan works best for people who have the discretionary income to make contributions, but it can offer significant tax savings over time.

In order to understand the benefits of an HSA, it's important to learn that these tax-deferred accounts work hand-in-glove with high-deductible health plans. While many companies offer a plan that includes the HSA; some do not, but you can open an account on your own at a financial institution.

What are the tax benefits of a Health Savings Account?

An HSA is considered a "triple tax-free" account that can help a family or individual shoulder higher out-of pocket costs for healthcare. It works like this: Your money goes into the account before taxes, where it grows tax-free. It can be used to pay for unreimbursed medical expenses, such as deductibles, prescriptions, coinsurance, dental work and eyeglasses. Not only does an HSA keep your out-of-pocket healthcare costs under control, it also lowers your taxable income and gives a boost to your retirement savings.

Isn't an HSA the same as an FSA?

A lot of people are familiar with the Flexible Spending Account, also known as an FSA; but HSAs are not the same as FSAs. While both can be used to cover health bills, there are two major differences: 1) FSAs require you to use up all the money in the account by 12/31, while HSAs don't; and 2) After you reach 65 years of age, you can withdraw from an HSA for nonmedical expenses without owing a tax penalty, however these withdrawals are considered taxable income.

Are there restrictions on HSAs?

In order to take advantage of a Health Savings Account you cannot be enrolled in Medicare or claimed as a dependent on some else's tax return. Also, your health plan must be a "qualified high-deductible plan," meaning the annual deductible must be at least $1,250 for individuals or $2,500 for families.

In addition to these restrictions, there are annual contributions limits for HSAs. If you open an account and you are under the age of 55, the maximum contribution is $3,250 for individuals and $6,450 for families. People over the age of 55 can contribute up to $4,250 for individuals and $7,450 for families. In 2014, the annual contribution limits will be $3,300 for individuals and $6,550 for families; however people over 55 years old can contribute an additional $1,000.

According to the Kaiser Family Foundation, many employers have also started contributing to employees' HSAs, offering an average of $919 for singles and $1,611 for families.

Unlike many other employee benefits, the contributions to a health savings account can be changed at any time during the year, provided you don't exceed the annual contribution limits. If your employer doesn't offer an HSA and you are eligible to open one, contact your financial institution. You will need to open the account by April 15th in order to make contributions for the current tax year.

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