Health Savings Accounts, or HSAs, are special savings accounts that allow you to save and invest money to be spent on medical expenses. They are triple-tax-advantaged accounts which means: contributions to the account are tax deductible, earnings grow tax free, and you are not taxed on withdrawals as long as the withdrawals are used to pay for eligible medical expenses.
Sounds phenomenal, right? There is a catch. In order to open and contribute to an HSA, you must meet certain eligibility criteria. You must be enrolled in a qualifying High Deductible Health Plan, you must not have other health insurance coverage unless it is also a HDHP, you cannot be claimed as a dependent on somebody else’s taxes, and you cannot be enrolled in any part of Medicare.
There are also limits on the amount of money you can contribute to your HSA. These limits DO change from year to year! Importantly, these limits also assume that you are enrolled in an HDHP for the entire year. If you are enrolled in an HDHP for only part of the year, your contribution limit is prorated proportionally. There is the ‘last-month-rule’ which can create an exception to the prorated limit, but if you want to take advantage of that we encourage you to talk to a tax professional. One last note about contribution limits, your employer can contribute to your HSA on your behalf if they so choose, and those contributions do tally against the contribution limits just like your own contributions.
Importantly, while there are limitations on when you can open or contribute to an HSA, the funds are yours for life to be spent on eligible medical expenses.
