Not sure if your health insurance qualifies you for a health savings account or HSA? Laura answers a listener question and covers the facts about what an HSA is and the rules to qualify for one.
What Happens to an HSA When You No Longer Qualify
A common question that comes up is what happens to an HSA balance if you become uninsured or switch to a non-qualified plan. The good news is that you can still use the money in your HSA to pay for medical expenses tax-free. However, you won’t be eligible to make any new contributions if you’re not covered by an HSA-qualified plan.
If you still have funds in an HSA after you turn 65 it morphs into something very similar to a retirement account. You can use the money for non-medical expenses without the steep 20% penalty, but still must pay income tax on those amounts.
How to Fund Your First HSA
You may be thinking that having an HSA sounds great, but where would you get the extra money to fund it? That brings me to one of the HSA’s best features: You can make a once-in-a-lifetime transfer from your IRA to fund an HSA without paying an early withdrawal penalty. That’s how I opened my HSA years ago.
7 Major Benefits of an HSA
To sum up, here are seven major benefits of an HSA:
- Contributions to an HSA are tax deductible up to the annual legal limit. That means you reduce your taxable income and the amount of tax you have to pay by funding the account.
- You never lose HSA funds because they stay in the account from year to year for your entire life, with no penalty if you don’t spend them.
- Withdrawals from an HSA are never taxed as long as you spend them on qualified medical expenses.
- Contributions grow tax-free when you have interest earnings or investment gains in an HSA, if you spend them on qualified medical expenses now or in retirement.
- You can spend an HSA on you, your family, or your dependents when there are qualified, out-of-pocket, medical expenses.
- You own an HSA and can decide how much to save or spend each year. It’s yours no matter if you change employers, switch health plans, become unemployed, or retire.
- If you no longer have an HDHP you can’t continue making contributions, however, you can always spend it on qualified expenses.
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