What is an HSA?
What is the maximum contribution I can make to my HSA?
The IRS sets the maximum contribution limits for the HSA each year. The maximum annual contribution limit for 2018 is $3,450 if you are enrolled in Individual coverage and $6,850 if you are enrolled in Family coverage. Once you are over the age of 55, you can contribute an additional $1,000 above the standard annual maximum. (Note: if both spouses are over the age of 55, each spouse would need have their own HSA to contribute the $1,000 catch-up)
If your HDHP was effective on January 1st, the total amount you can contribute to your account is the maximum contribution amount set by the IRS. If your HDHP is effective after the first day of the month, you may make or receive a full year’s contribution to your HSA for partial year coverage as long as you maintain your HDHP enrollment for 12 months. If enrollment is less than 12 months, the tax benefit is lost and a 10% penalty is imposed.
Who is eligible to open and contribute to an HSA?
If you are enrolled in qualified High Deductible Health Plan (HDHP) – either through your employer or you have purchase and individual policy – you are most likely eligible to open and contribute to an HSA. Additional eligibility criteria include:
- You must have a valid Social Security Number (SSN) and a primary residence in the U.S.
- You cannot be covered by any other type of health plan, including Medicare Part A or Medicare Part B.
- You cannot be covered by TriCare.
- You cannot have accessed your VA medical benefits in the past 90 days (to contribute to an HSA).
- You cannot be claimed as a dependent on another person’s tax return (unless it’s your spouse).
- You must be covered by the qualified HDHP on the first day of the month.
Using your HSA for retirement
What does retirement have to do with health care? A lot. And there’s an investment vehicle out there that can help with it.
Most people aren’t thinking about Health Savings Accounts (HSAs) as an investment option for retirement, but an HSA is one of the best options on the market. As the name implies, HSAs are designed to help individuals sock away cash for medical expenditures. HSAs offer several other benefits, such as:
100% of unused funds roll over year-after-year,
funds go with you even if you switch employers,
they can pay for the eligible expenses of your legal spouse and tax dependents regardless of their insurance, and
be used for Medicare premiums as well as qualified long-term care premiums.
Most employees use HSAs for short-term costs; however, building those funds long term is just as important. A recent study by the Employee Benefit Research Institute (EBRI) found that more Americans are turning to HSAs to cover medical expenses, but very few use them for retirement planning. The study also found that few people are investing their HSA funds for the long term, and even fewer are maxing out their HSA contributions. The research was based on nearly 6 million HSAs with $13 billion in combined assets. And regardless of any findings, most people will incur substantial health costs in retirement, for which HSAs can help.
It’s important for participants to understand the best way to use the HSA is by treating it as an investment tool, primarily because of the triple-tax advantage. As of just a few years ago, 4% of accounts had investments other than cash. Understanding the HSA’s investment potential won’t occur overnight for most people. It’s also unreasonable to expect everyone to have the wherewithal to use their account solely for investing.
However, by educating participants and employers on the long-term value of the HSA, it’s realistic to expect a behavioral shift and an uptick in participants using the HSA as an investment tool for retirement. A key point here is to start using and funding HSAs now, while contributing close to the annual limits if possible.