Health savings accounts for the self-employed

Between doctor visits and prescription drugs, rising medical costs can impact the financial health of your business. A health savings account, or HSA, can help the self-employed offset their medical expenses and reap significant tax benefits.

What is a health savings account?

A health savings account is a tax-advantaged savings account that is used for qualified medical expenses. These include doctor or hospital visits, co-pays or prescription drugs.

If you're under 65, you face a penalty for using HSA funds for non-qualified expenses. When you turn 65, that penalty no longer applies. See IRS Publication 969 for more information on qualified medical expenses.

You can open health savings accounts for the self-employed with any qualified HSA trustee. But you are only eligible to open an HSA if you meet the following criteria:

• You are enrolled in a high-deductible health insurance plan (HDHP)
• You're not enrolled in other medical coverage‚ this includes Medicare
• You can't be claimed as someone's else dependent on a tax return

Why are only high-deductible plans eligible for HSAs? As a high-deductible plan enrollee, you take on a larger medical cost burden than someone with a low- deductible plan.

Fortunately, high-deductible plan premiums are also generally less expensive. You can check with your insurance provider to see if your insurance plan is HSA-eligible. Regardless, don't forget that you can often deduct the costs of your insurance premiums, too.

What are the benefits of an HSA?

The main benefit of HSAs: they're triple tax-advantaged accounts. The tax benefits of the account are:

• The amount you contribute to an HSA is tax-deductible
• You can withdraw HSA dollars tax-free at any age when used for qualified medical expenses
• Your HSA account interest is also tax-free

Much like a bank account, you can earn interest on your HSA by opening an interest-bearing HSA account. These are available with numerous large banks and local credit unions. You can even invest your HSA contributions in stocks or mutual funds.

Some HSA adoptees opt not to withdraw from their HSAs until retirement. Instead, they use their HSAs as a retirement savings vehicle and allow the money inside the HSA to grow tax-free for decades.

The benefits of health savings accounts for the self-employed extend beyond the purely financial. The account also gives you the healthcare consumer greater control over your everyday healthcare spending.

Even better? If you change employers, your HSA account and the money inside it stay with you without expiring.

How do health savings accounts work for the self-employed?

Health savings account operate in much the same way for the self-employed as they do for traditional employees. Only, you cannot contribute more than your net self-employment income to an HSA.

In 2019, individuals can contribute a maximum of $3,500 to an HSA. The Family HSA contribution limit is $7,000. Individuals 55 and up can throw in an additional $1,000 in catch-up contributions.