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Health savings accounts (HSAs) are tax-advantaged vehicles for individual investors to pay for common and emergency medical expenses. In many ways, HSAs incorporate the most favorable elements of other self-directed retirement plans:

  • You may deduct HSA contributions from your annual income for an immediate tax benefit (as with a Traditional IRA).
  • HSA distributions can be 100% tax-free (as with a Roth IRA) if they're applied toward qualified medical expenses.
  • HSAs can accept employee and employer contributions (as with a SIMPLE IRA or Solo 401(k)).

You must have single or family coverage through a high deductible health plan (HDHP) to yield the benefits of an HSA. Your deductible counts as a qualified medical expense and may therefore be covered by HSA funds.

Contribution Deadlines & Annual Limits

Tax Year Annual Contribution Limit
(Single HDHP)
Annual Contribution Limit
(Family HDHP)
Catch-Up Contribution
(age 55 or above, any HDHP)
2019 $3,500 $7,000 +$1,000
2020 $3,550 $7,100 +$1,000

You can make a contribution to a new HSA for a given tax year if you open the account prior to April 15th the following calendar year. However, HSA funds may not be used to cover qualified medical expenses incurred prior to the account opening.

Example Scenario

Step 1: You're in a car accident in December 2018 and have to pay a hefty hospital bill. You also find out that you'll need physical therapy to recover from your injuries. To help offset these expenses, you open an HSA in January 2019.
Step 2: You're enrolled in a family HDHP, allowing you to contribute $7,000 for the 2019 tax year. You also have until April 15th to contribute $6,900 for the 2018 tax year, even though your HSA was not open during the 2018 calendar year.
Step 3: You cannot pay the medical bills you incurred in December 2018 with the HSA you established in January 2019. However, your combined contributions ($13,900 in total) could go a long way toward covering your ongoing physical therapy.
Result: You'll have to pay for physical therapy no matter what. By applying your HSA contributions toward that qualified medical expense, you'll never pay income taxes on your $13,900 deposit (tax-deferred upon contribution, tax-free upon distribution).

HSA Contribution Rules

Tax Year HDHP Minimum Qualified Deductible HDHP Maximum Qualified Out-of-Pocket Exposure
2019 Single: $1,350
Family: $2,700
Single: $6,750
Family: $13,500
2020 Single: $1,400
Family: $2,800
Single: $6,900
Family: $13,800
  • Contributions (employee or employer) made to an Archer MSA will count against your annual HSA contribution limit.
  • You cannot make HSA contributions if you're enrolled in Medicare.
  • If you were considered eligible for benefits under your HDHP for the full year having not changed your coverage throughout that period, you may contribute the maximum allowable amount in accordance with your individual circumstances.
  • If you were not considered eligible for the full year or you changed coverage at some point over that period, you may contribute the greater of:
    • The "Limitation" figure that you may calculate using Instructions for Form 8889 > Part 1 - HSA Contributions and Deductions > Line 3 Limitation Chart and Worksheet
    • The maximum allowable amount in accordance with your individual circumstances as of the first day of the final month of your tax year (which would only vary from other tax years if you file an extension beyond the normal tax filing deadline of April 15th or thereabouts).
  • "Last-Month" Rule - If you are eligible for benefits under your HDHP on the first day of the final month of your tax year, you are considered eligible for the full year.
    • You must maintain eligibility throughout the testing period, which begins on the first day of the final month of your tax year and ends on the last day of the same month 12 months later (i.e. April 1, 2019 through April 30, 2020).
    • If you do not maintain eligibility during the testing period, your HSA contributions will be considered income for tax purposes in the applicable year. An additional 10% penalty may also apply.
  • Once in your lifetime, you may transfer cash or assets from a Traditional or Roth IRA into your HSA (you may transfer funds between HSAs at your leisure). The maximum amount that you're able to transfer will depend on your HDHP (single vs. family) and will count against your annual contribution limit.

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