A health savings account (HSA) is a triple tax-free account, where you make pre-tax contributions, which grow tax-free, and can be withdrawn tax-free to pay for eligible health care expenses for yourself, spouse, or tax dependents. To qualify:
- You must be covered under a high deductible health plan (HDHP)
- You cannot be covered by any other non-HDHP plan
- You cannot be enrolled in Medicare
- You cannot be claimed as a dependent on someone else’s return
For 2016, the annual contribution limit for an individual with self-only coverage is $3,350 and family coverage is $6,750. If you are 55 or older, an additional catch-up contribution of $1,000 can be made. Annual out-of-pocket expenses cannot exceed $6,550 for self-only coverage or $13,100 for family coverage.
Additionally, a HSA can not only be used for paying medical expenses, but also as a supplementary retirement account. Once you are 65 or older, you can withdraw funds for nonmedical expenses; you’ll owe taxes on the withdrawal, but no penalty.
You never lose your contributions, they rollover year after year and stay with you if you change jobs or leave the workforce. Your contributions also gain interest tax-free. A portion of the money in your HSA can be used to invest in mutual funds.
Comment below on whether you save your HSA money for retirement or use it now for current medical expenses?