Planning Ahead With A Health Savings Account
One of the best kept secrets of the financial planning industry has almost nothing to do with stocks, bonds, or retirement accounts. It’s called a Health Savings Account (HSA), and using one can save you thousands of dollars a year in medical costs, and reduce your tax burden at the same time.
What Is A Health Savings Account?
A Health Savings Account is a personal savings account that you set up to help pay for future medical expenses. The account can be set up in various ways, including through your employer if they offer it, and is transferable across employers.
Each year, you decide how much to contribute to your Health Savings Account, up to a government-mandated maximum. In 2018, the limits are:
- $3,450 for individuals
- $6,900 for families
- Adults over 55 can contribute an additional $1,000
When you create an HSA, you receive a debit card (and/or checks) linked to your account and you can use the funds you’ve contributed on eligible medical expenses.
Your HSA balance rolls over from year to year, so you never have to worry about losing the money you’ve already contributed. Once you’re over age 65 and enrolled in Medicare, you can no longer contribute to an HSA, but you can still use the money for out-of-pocket medical expenses.
HSA Financial Benefits
So why use a Health Savings Account at all? What makes using an HSA better than just putting the same amount of money in a plain old bank savings account? Two words: tax benefits.
Using an HSA provides the following tax incentives:
- Contributions are pre-tax/tax-deductible
- Funds grow tax-free
- Funds come out tax-free
Additionally, because your income is taxed after you make HSA contributions, you will be taxed as though you make less money. For example, if you make $50,000 per year and put $3,000 in your HSA, you will be taxed as though you make $47,000, thus lowering your tax burden.
Health Savings Account Requirements
To use a Health Savings Account, you must be enrolled in what’s called an High-Deductible Health Plan (HDHP). In short, this means that your health plan deductible needs to be at least $1,350 for yourself, or $2,700 for your family.
The IRS is the agency that determines what qualifies as an HDHP, and the minimum amounts change from year to year.
Setting Up An HSA
If you don’t already have access to a Health Savings Account through your employer, there are a variety of options for outside providers.
Consider speaking with a financial planner to discuss your needs and see if utilizing an HSA is the best option for you and your family. If you do already have an HSA set up, now is the time to max out your contribution.
For additional information about setting up a Health Savings Account, and how it can fit into your overall financial plan, please give us a call or schedule a free consultation.
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