Health Savings Accounts , also known as “HSAs” are a popular tool for making tax deductible contributions to an account that can be used for eligible health care expenses, now or in the future. HSAs can be opened by anyone with what is considered a “High Deductible Health Plan” or “HDHP” (see definition below). Contribution limits in 2017 are $3,400 for individuals and $6,750 for families. HSAs are a powerful tool but not everyone who is eligible to contribute to and use an HSA is familiar with all of the benefits of these types of accounts. Some of these benefits are covered below.

Spousal Contributions: The maximum contribution amounts for family plans apply collectively to both spouses. Even if one spouse is the primary insured (their company offers the health plan for instance) both spouses can contribute to their own HSAs as long as they collectively do not exceed the annual maximums. Example : Bob and Mary are married and Mary’s company offers HDHP family coverage which the family has opted to use. Bob and Mary each have their own HSAs and could each contribute half of the annual $6,750 ($3,375) to their own HSAs.

Over 55 Catch Up: Individuals who are over 55 at the end of the tax year can also make an additional $1,000 contribution. For married couples, if both spouses are 55 or older and not enrolled in Medicare, each spouse’s contribution limit is increased by the $1,000. Note: Each spouse must make the additional contribution to his or her own HSA.

Employer Contributions : If you are lucky enough to have your employer contribute to your HSA, then those contributions count against your total contribution limits for the year. Example :  if you have a family HDHP and your employer contributes $2,000 to your HSA, then you have would have $4,750 ($6,750-$2,000) remaining to contribute to the rest of your family’s HSAs.

Tax Deductibility: The deduction for contributions to HSAs can be accounted for in two places. If your employer coordinates contributions to your HSA out of your pay, then your taxable income will be reduced accordingly and reflected on your W2. If you make contributions to an HSA that are not coordinated by your employer then your contributions would be deducted on line 25 of your 1040 .

Taxation of Distributions: Another wonderful benefit of the HSA is that distributions from the accounts to pay for medical expenses are tax-free. If you don’t use the HSA for medical expenses you are able to take distributions from the account after age 65 for ANY purpose but you do have to pay income tax on any distributions. Or you could keep it around for possible long-term care expenses.

Investing HSA Account Funds: Some HSA custodians allow you to invest the funds in your HSA. That means if you don’t currently need what you have accumulated in your account, you can invest it. Each HSA provider has different rules about how the handle investments for their HSAs but you can probably use an investment vehicle that can complement your overall investment strategy.

Coordination with FSAs: HSAs and Flexible Spending Accounts or “FSAs” are often confused with one another. Although they have similar purposes there are some key differences between the two types of accounts. For one, FSAs can be used by anyone (if offered by their employer) and are not limited to those with HDHPs.  FSAs are funded through salary deferral and are only offered through employer benefit plans. FSA contributions have to be spent during the plan year and cannot be rolled over from year to year. Contributions to both an FSA and HSA reduce your taxable income and are both used to pay for qualified medical expenses. Using both together can be a truly effective way to leverage the ability to deduct the costs of your current and future medical expenses.

Note that you may not ‘overlap’ coverage of expenses, meaning that you may only use FSA or HSA money to pay for expenses not already covered by insurance.

Definitions

Flexible Spending Accounts (FSAs): Provide employees the opportunity to set aside pretax dollars to pay for unreimbursed medical, dental, vision, and orthodontia expenses for themselves and qualified dependents.

Health Savings Accounts (HSAs): A tax advantaged account that’s paired with a high-deductible health plan (HDHP) to pay for qualified medical expenses for themselves and qualified dependents.

High Deductible Health Plans (HDHPs): For calendar year 2017, a “high deductible health plan” is defined by the IRS as a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 for self-only coverage or $13,100 for family coverage.

IRS Publication 502 : Lists qualified medical and dental expenses that could be paid with funds in an HSA or FSA.