When you have a health savings account you’re allowed to make contributions to the health savings account that are deductible from your income. There are limits to the amount that is deductible each year, and these limits are set by the IRS.
In order to have a HSA, you must also have a High-Deductible Health Plan (HDHP), which is a health insurance policy that, as the name implies, has a high deductible. Qualified plans have a minimum deductible of $2,600 for families (for 2017) or $1,300 for singles. In addition, HDHPs have a maximum annual limit on the sum of the deductible and out-of-pocket expenses that you must pay. Out-of-pocket expenses include co-payments and other amounts, but do not include premiums paid. The maximum sum of deductibles and out-of-pocket payments for a qualified HDHP in 2017 is $13,100 for family coverage, or $6,550 for single filers. These figures have not changed from the 2016 limits.
For 2017 you are allowed to deduct up to $6,750 in contributions to your Health Savings Account (HSA) if you are covering your family with the HSA. If you are only covering yourself, the limit is $3,400 for 2017. There is an additional “catch-up” amount of $1,000 allowed if you are over age 55 during the calendar year 2017. The self-only contribution limit increased for 2017 (by $50); all other figures remained the same as 2016.
If you make the contributions out of your income, you are allowed to deduct up to the allowable limits from your income. If your employer makes the contributions to the account, you are allowed to exclude the amount of the contributions, up to the limits, from your income.
You then can use the funds in your HSA to pay qualified expenses. If you don’t use the full amount of your deductible contributions in any given year, you can leave the funds in the HSA to grow tax free. In this sense, the HSA works much like an IRA – and in fact, if you’ve got the option to rollover your IRA (or a portion of it) into your HSA. On the other hand, you don’t have the option to rollover your HSA into an IRA.
Within the HSA you can make investments, much like an IRA. Depending on how you use the HSA though, you probably don’t want to put your money at risk. Often HSA funds are used up during the tax year for qualified medical expenses, so if the money is in a fluctuating investment you could wind up with less in your account than you expected when it comes time to pay the expenses. Any amounts left over at the end of a tax year might be invested for long-term if you’re continuing to contribute in the next year, but otherwise you’ll probably want to leave your annual contributions in a liquid form, such as a money market investment to ensure that the money is available when you need it.
You have the opportunity to continue using the funds built up in your HSA over your lifetime for qualified medical expenses, or you can withdraw the funds for other purposes. If used for qualified medical expenses, there is no tax on the distribution (although it must be reported on Form 8889). If the distribution is not for qualified medical expenses, you must pay ordinary income tax on the distribution, plus a 20% penalty (also reported on Form 8889).
Upon your death, if your spouse is the designated beneficiary, he or she may continue to utilize the HSA as if he or she had made the original contributions. If someone other than your spouse is the designated beneficiary of the HSA, upon your death the account ceases to be an HSA and becomes fully taxable to the beneficiary as of the year of your death (but no penalty).