SHOULD YOU START A HEALTH SAVINGS ACCOUNT (HSA)?
In 2003, the government established Health Savings Accounts (HSAs) as a way for people covered under high-deductible health plans (HDHPs) to get special tax treatment towards saving money for medical expenses not paid for by their insurance. With an HSA, payers were able to receive a tax benefit for saving money to cover their deductible. As HDHPs gained popularity, the government wanted to incentivize saving to cover the higher deductibles, so that medical events would not be financially devastating for those with insurance in place. HSAs offer two important benefits to consider.
Two Unique Benefits
An HSA has two unique benefits that make it especially appealing. First of all, you can contribute money to your HSA pre-tax. Because tax hasn’t been taken out, you end up with more to contribute. Many people have their HSA money withheld directly from their paycheck so that they never even see it or have to pay taxes on it. Even if you fund your HSA with after-tax dollars and don’t have it automatically withheld, you can still receive the same tax benefit in the form of a deduction when you file your taxes. Either way – save now or save later – you still save on taxes by contributing to an HSA.
Not only do you save on taxes when you put money into an HSA, you save when you take it out as well. As long as it is for qualified medical expenses, distributions from an HSA are tax-free. This makes an HSA very unique among government savings plans such as 401(k)s or Roth IRAs. Usually, you either contribute pre-tax but have to pay taxes on withdrawals, or you pay your taxes upfront before contributing and don’t get taxed on the withdrawals. Health Savings Accounts take the best of both kinds of plans to make a superiorly tax-advantaged savings vehicle.
However, withdrawals that are not for qualified medical expenses are not tax-free. If money is withdrawn for reasons other than qualified medical expenses, it is subject to normal income tax rates and a 20% penalty if the account holder is under the age of 65.
Who Can Participate?
You would think that with such great tax treatment, everyone would have an HSA. However, not just anyone is eligible to open one. If you want to open an HSA, you must be covered by an HDHP, not enrolled in Medicare or other health coverage, and not claimed as a dependent on someone else’s tax return. As per IRS rules, to be considered an eligible HDHP the plan must have a minimum deductible of $1,300 for singles or $2,600 for a family. The maximum out-of-pocket expenses are $6,550 for singles or $13,100 for a family. Though designed to help cover the costs of high deductibles, the IRS has capped contributions below the HDHP maximums at $3,350 for singles and $6,750 for families, with a $1,000 catch-up contribution available to those over 65.
HSAs are individual accounts, not joint accounts, so for married couples, only one spouse owns the account (the one through which the insurance has been acquired) while the other can be given rights to it as an authorized user. When the account owner dies, their spouse may take over the account and use it as their own without paying any taxes (for qualified expenses) or penalties.
As long as an individual is covered by an HDHP, anyone may make contributions to the HSA up to the IRS-imposed limits mentioned above whether it is the individual, the employer, a family member, or another third party. Once an individual ceases to be covered by an HDHP, they are still permitted to use the funds in the HSA for eligible expenses, but they (and anyone else) are no longer allowed to contribute to it.
When setting up a Health Savings Account and deciding the best way to use it, it is important to work with a knowledgeable financial professional. Your investment options for your HSA may be limited and it's important to work with a qualified investment professional when selecting your investments. If you would like to know more about Health Savings Accounts or the prudence of using your current HSA for retirement savings, we can help you evaluate your options to maximize your future without sacrificing the present. Call our office at 703.584.2700 or email firstname.lastname@example.org today.
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