Each year, the IRS sets maximum contribution limits for health savings accounts (HSA). The HSA maximum contribution for 2018 increased from 2017, and it will climb again 2019. But under certain circumstances, you can breach these limits without penalty. However, there are certain HSA contribution rules you should follow to avoid consequences. This article will explain those rules, contribution limits and more.
What Are the HSA Contribution Limits for 2018?
The HSA maximum contribution for 2018 stands at $3,450 for individual coverage and $6,900 for family coverage. However, these rules apply to people who keep their HSA coverage status for the entire year. The limits apply a bit differently for those who change coverage mid-year. Events such as marriage, divorce or change in job can trigger these events. So we’ll explain how the rules apply below.
HSA Contribution Limits for 2018 When You Change Coverage
Any time you change your HSA status from single coverage to family coverage or vice versa, your maximum contribution for the year changes to the greater of the following options.
- Option1: Maximum annual contribution limit based on coverage status for each month of the tax year combined, and then divided by 12.
- Option 2: Maximum annual contribution based on coverage status on December 1 of the tax year change was made.
It may sound a little complex. So let’s go over some examples. Say you started out with family HSA coverage in January 2018 and switched to single coverage in July 2018. Under the first option, your maximum contribution limit for 2018 becomes $5,175 (average of maximum contribution limits for six months of single coverage and six months of family coverage).
You’d take the result of the first option because it would rise above that of option 2. In this case, your coverage status on December 1 (single coverage) would be only $3,450.
Now what if you pick a health insurance plan last minute and open an HSA account last minute? Well, you can take advantage of the “last month rule.” This dictates that if you were eligible for an HSA on December 1 of the tax year, you’re considered eligible for the whole year. This means you may contribute the full amount based on your coverage status. To keep this perk, however, you must remain covered until December 31 of the following year. If you fail to do so, you’d owe income tax based on the contributions you made during the time you stayed eligible (except for the ones you made based on the last month rule) plus a 10% penalty tax.
As you can see, this can get extremely complicated if you, say, change jobs at some point during the next year. Thus, it may be best simply to contribute up to the maximum based on your coverage status on a month-by-month basis.
What If You Want To Contribute More to Your HSA?
When you turn age 55, the IRS allows you to make additional “catch-up” contributions of $1,000 to your HSA medical account. Federal law sets this static rate, so the IRS doesn’t adjust it every year for inflation.
But it gets a little tricky for family coverage HSAs. HSAs, including family coverage, ones exist under one account holder’s name. So, technically, there is no joint HSA. This means that if you’re married, you and your spouse can’t make $2,000 worth of catch-up contributions to the same HSA even if you’re both at least age 55. In this case, each may want to open a separate single-coverage account. But the decision can get complicated. So you might want to find a financial advisor to weigh the pros and cons of doing so.
In addition, you can continue making contributions into your HSA after turning 65 as long as you’re not also enrolled in Medicare as the IRS consider this a change in coverage.
Regardless of age, however, it’s important to contribute as much as you can.
Why You Should Meet the HSA Maximum Contribution Limits for for 2018
You can make tax-deductible contributions up to the maximum in 2018. This means that come tax time, you can reduce your federal taxable income by the amount you contributed. So say you’re making $40,000 in 2018. You have a single coverage HSA and contributed $3,450. As a result, Uncle Sam taxes you as if you made the difference or $36,550 that year. And under the Trump Tax plan, you’d actually fall from the 22% tax bracket to the more generous 12% one.
And as long as you’re enrolled in an HSA-eligible high-deductible health plan (HDHP), you have until April 15, 2019 to reach your maximum and claim it as a deduction for tax year 2018.
How Can You Meet HSA Contribution Limits for 2018?
In order to contribute to an HSA, you must be enrolled in an eligible HDHP. The IRS defines what a high deductible health plan actually is.
For 2018, an HDHP must carry a deductible of at least $1,350 for single coverage. That minimum climbs to $2,700 for family coverage. And the out-of-pocket maximum for an HDHP can’t exceed $6,650 for single coverage. For family coverage HSAs, the out-of-pocket maximum can’t breach $13,300.
Bu that’s not all. Your HDHP must also pass other tests. For example, you won’t qualify to open an HSA if you’re HDHP covers any non-preventive care benefit before you meet your deductible. So ask your insurance carrier or employer’s benefits department if your HDHP can link to an HSA based on IRS requirements. If not, you may want to switch to a plan that can be paired with an HSA. The bright side is that you can open an HSA through a bank or financial institution even if your employer doesn’t offer one– just as long as your HDHP makes the cut.
How Much Can You Contribute to an HSA in 2019?
The HSA maximum contribution limit for 2019 rises to $3,500 for single coverage and up to $7,000 for family coverage. But remember, your HDHP would still need to meet IRS requirements in order for you to be eligible to link it up with an HSA.
In 2019, an HDHP must have a minimum deductible of $1,350 and an out-of-pocket maximum that doesn’t exceed $6,750 for single coverage. For family coverage HDHPs, the minimum deductible can’t dip below $2,700 and the out-of-pocket maximum can’t exceed $13,500.
Contributing to an HSA can be as beneficial as it is complicated. Ultimately, you have to follow IRS rules. If you stay covered by an HDHP for the entire year, the HSA maximum contribution for 2018 is pretty clear cut. But make sure you understand the HSA rules that apply when you change or lose coverage mid-year for whatever reason. And remember, you can start making additional catch-up contributions when you turn 55. And you can continue contributing after age 65 only if you meet standard eligibility and are not enrolled in Medicare. Regardless, the money in your HSA is yours to keep. You can use it tax-free on any qualified medical expense. Limits change each year so keep an eye on IRS announcements, or just keep reading more content on SmartAsset.
- If you have eligible HDHP but your employer doesn’t offer an HSA, you can open one through many financial institutions. To facilitate your search, we published a piece on the best banks in the U.S.
- An HSA serves as one of many beneficial tax-advantaged vehicles. However, you can also open an individual retirement account (IRA). In fact, an HSA can serve as a powerful retirement-savings tool when used in conjunction with an IRA or a 401(K).
- A financial advisor can help you determine how best to use your HSA. SmartAsset’s free financial advisor matching service can pair you with an advisor in your area based on your needs. You’ll answer a short series of questions about your financial situation and goals. Then the program matches you with up to three financial advisors nearby. We fully vet all of our financial advisors and make sure they are free of disclosures.
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