A Health Savings Account is a type of savings account like the IRA that helps people pay for their health care expenses. With a HSA you can pay any current health care expense, save for future medical expenses and retiree health expenses tax-free. The money in your account is owned by you; you don’t need any interference from anyone into any decision you make regarding this money. The very fact that this savings account can be well utilized during your retirement, this acts as a catastrophic health insurance. The HSA is ‘savings for a rainy day’.
Contributing to your HSA
There are many different ways you can contribute to your HSA. The maximum contribution you can make towards the HSA is only $3,050 for individuals with only self-coverage; and, $6,250 for individuals with full family coverage. Once your HSA is established and a minimum contribution is done, you need not make any extra contribution to your account.
Health Savings Account rules dictate employers to follow certain rules with respect to the employees’ contributions. If the employer provides a Section 125 plan and allows them to make their own HSA contributions through salary reduction, the contributions are non-discriminatory. These rules have been established to ensure that every employee makes equal contributions – no favor for the highly compensated employees.
People over the age of 55 are allowed to make additional Health Savings Account contributions of $1,000. This is called a catch-up contribution. If their spouse is over 55, even they can make an additional contribution of $1,000, but needs to do it in their own HSA. This is an annual contribution only.
If you happen to drop or lose your coverage before year end, you cannot make the full contribution to your account. The contribution needs to be pro-rated. To find out how much you can contribute, count every month that you had the coverage on the 1st of that month only. If you lose your coverage at the end of August, you can contribute only the proportionate amount of four months.
HSA Contributions should always be made in cash. You cannot use stocks or property as contributions to your account. However, a one-time transfer from your IRA to HSA is allowed. This one-time transfer should be made as a direct trustee to trustee transfer.
You are not allowed to contribute more than the allowed amount in a year. You have to withdraw the excess contributions before tax filing deadline (if you don’t want to pay an excise tax penalty of 6%). Contributions by employers that exceed the annual limit are added as taxable income to the account holder.
Opening a HSA account also serves as an investment. This is the ‘two birds with one stone’ answer to your question, ‘how to invest?’ The earnings on the funds due to interest or investment are accrued in the account tax-free. The account balances can grow faster and the savings aspect of the account is enhanced. Remember, this is not a health insurance for students. While HSA contributions can help you in setting investment goals, they shouldn’t be the only way you invest.