Personal Finance

New Changes to Your HSA

Your health savings account (HSA) can be your one of your best friends when medical expenses hit, allowing you to tap a fund of pre-tax money to meet ever-spiraling health-care costs. Here are the latest numbers concerning these accounts and some potential new uses for the money.

HSAs are tax-exempt trusts or custodial accounts you set up, often through your employer, with a qualified trustee such as a bank of insurance company. You contribute pre-tax dollars directly to the fund from your paycheck. You can use your funds to pay qualified medical expenses ranging from prescriptions to dental fillings to complex surgery.

To have an HSA, you must also have a high-deductible health plan (HDHP) insurance policy. Qualified plans, according to the Internal Revenue Service, set a minimum 2015 deductible of $2,600 for families and $1,300 for single coverage.

HDHPs also come with a maximum annual limit on the sum of the deductible and out-of-pocket expenses that you must pay. Out-of-pocket expenses include your co-payments and other expenses but not premiums you paid. The out-of-pocket maximum for a qualified HDHP in 2015 is $12,900 for family coverage, $6,450 for single coverage.

This year you can deduct on your tax return up to $6,650 in contributions to your HSA if you cover your family and $3,350 if you cover only yourself. You can contribute an extra $1,000 to your HSA if you're 55 or older.

Your rate of return holdings in an HSA depends on the underlying investment. If the money is in a savings or money market account, it might earn around 1%, for example. If you don't use the full amount of your deductible contributions in any given year, you can leave the funds to grow tax-free.

In this sense, the HSA works much like an individual retirement account - in fact, you can roll all or a portion of your IRA over into your HSA . You can also make investments with an eye to openly funding retirement , much as with an IRA; vendors increasingly tout a widening menu of investments for almost any risk tolerance.

You may not want to risk this money, though. Often you need all your HSA during the year for medical expenses. If the money is tied to a fluctuating investment, you might wind up short when doctors' bills arrive.

You can continue using funds in your HSA for qualified medical expenses over your lifetime, or you can withdraw the funds for other purposes. If you use the money for qualified medical expenses, you pay no tax on the distribution, although you must report it on IRS Form 8889 when you file your taxes for that year.

If your distribution doesn't go toward qualified medical expenses, you pay income tax on the money, plus a 20% penalty.

At your death, your spouse (if the designated beneficiary) may continue to use the HSA as if he or she made the original contributions. If someone other than your spouse is the designated beneficiary, at your death the account ceases to be an HSA and becomes fully taxable to the beneficiary.

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Jim Blankenship, CFP, EA, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author ofAn IRA Owner's Manual and A Social Security Owner's Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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