Health Savings Accounts for 2014

When you have a Health Savings Account, you’re allowed to make contributions to the 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 $2,500 for families (for 2014) or $1,250 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 2014 is $12,700 for family coverage, or $6,350 for single filers.

For 2014 you are allowed to deduct up to $6,550 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 $3,300 for 2014. There is an additional “catch-up” amount of $1,000 allowed if you are over age 55 during the calendar year 2014.

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, including premiums.  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.  Typically 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).

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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  • First off, thanks for all of the great inaomrftion on the site. I’ve read most of what’s on here and have also read The Four Pillars. I currently max out my 401k and plan on doing a Roth IRA conversion this year and am going to find a way to invest my HSA soon. I currently contribute about 40 % of my 401k as Roth and the rest Traditional. Is that too high of a percentage? Especially with the tax increases slated for next year? Thanks for any help.

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