Looking to shield some of your hard-earned money from income taxes? You should definitely consider funding a Health Savings Account (HSA). You deposit a portion of your wages into the HSA and get a tax write-off for the deposit. The money held in the HSA is typically invested in stocks, bonds and mutual funds. The investments grow tax deferred and withdrawals are tax free as long as the money is spent on qualified medical expenses.
Qualified medical expenses include doctor visit copays, prescription drugs, some over-the-counter medicines, vaccines and many others. Some expense that are not included are cosmetics, dental floss and health club memberships.
The maximum annual contribution for the 2020 tax year is $3,550 for self-only coverage and $7,100 for family coverage. In 2021 these amounts increase to $3,600 and $7,200 respectively. Taxpayers age 55 or older can make an additional $1,000 contribution in 2020 and 2021.
To be eligible for an HSA, you must be covered by a high deductible health plan. For the 2020 and 2021 tax years, the minimum deductible that is considered “high deductible” is $1,400 for individuals and $2,800 for families.
Medicare and Medicaid recipients are not eligible to contribute to an HSA, however if they have a preexisting HSA they can still take tax free distributions as long as the funds are spent on qualified medical expenses.
Many employers offer HSA to their employees. If your employer does not offer an HSA, you can open one without them.
At some point in life almost all of us will have medical expenses that qualify for tax free distributions from an HSA. That is what makes this type of account so popular and useful.