More people are taking advantage of the tax benefits of a health savings account since more of the burden of health care and health insurance cost falls to employees. But millions more Americans should consider how the tax benefits of Health Savings Accounts would help their pocketbooks now and in the future.
What Are Health Savings Accounts?
Health Savings Accounts have been around since 2003. They provide tax benefits that can stretch from now into your retirement. Employers or employees can make contributions to these accounts, and both see benefits.
Employers who contribute can avoid payroll taxes.
Employees gain a three-fold tax benefit:
- Any contributions are a direct reduction in your income.
- Interest earned on the savings is not taxed.
- When you withdraw the funds for qualified medical expenses, the money is not taxed.
Basically, you’re sheltering a portion of your income from ever being taxed. Not bad.
Unlike a Flexible Savings Account that employers also may offer, a Health Savings Account has no limit on how much can be carried over from year to year. So you can be creating a large pool of money for a catastrophic illness or your retirement years, when health-care costs generally are higher.
Who Is Eligible to Use a Health Savings Account?
Health Savings Accounts are available only to those who have a high deductible health plan.
For 2019, the deductible on a single plan must be a minimum of $1,350; for a family, the deductible must be at least $2,700. Also, the maximum for all deductible and out-of-pocket expenses must be $6,750 for singles and $13,500 for a family plan.
If you are married but have separate health plans at your jobs and one spouse has a high deductible plan, that spouse still is eligible to create a Health Savings Account.
Younger, healthier workers who have access to a cafeteria health plan at work might consider choosing a high-deductible health plan. The extra money you would have paid for a more-expensive, lower-deductible insurance can be shifted into a Health Savings Account, giving you some tax savings now and a pot of money that you can access tax-free later in life when you can expect to have higher out-of-pocket expenses for your medical care.
How Much Can I Contribute to a Health Savings Account?
If you have a self-only plan, you can contribute up to $3,500 in 2019. The maximum for a family plan is $7,000. If you are 55 or older at the end of the tax year, you can contribute an extra $1,000.
Many taxpayers who already contribute the maximum allowed into an IRA or 401(k) account each year see the Health Savings Account as another way to contribute to their retirement since the money doesn’t have to be spent in the same calendar year.
You also are allowed to kick-start your HSA by rolling an IRA into the account, as long as it doesn’t exceed the annual limit. You’re only allowed to do this once, however.
When and How Can I Spend the Money?
You can spend the money without tax or penalty for any qualified medical expenses incurred after you established the account.
Qualified medical expenses generally include any medical or dental expenses deemed necessary. Such things as elective cosmetic surgery or most non-prescription drugs are not included.
Beyond your normal medical expenses, funds from a Health Savings Account can be used for certain types of insurance premiums, such as long-term health coverage or continuation of a health care plan, such as COBRA, which a great benefit for those aiming for an early retirement.
Can I Get a Health Savings Account Only through My Employer?
Absolutely not. You can sign up for an account through many banks, brokerage services, and even health insurance companies. You just have to make sure they are registered Health Savings Accounts, and you need to report your contributions on your income taxes.
Even if you have a plan through your employer, you can create a separate account and transfer the money from your work account if you think you can get a better return on your dollar. In particular, younger investors who are confident they won’t need the money anytime soon can seek longer-term investments that provide a better return or even a riskier investment that might pay off more but risks a loss that would not be devastating to a younger investor. Remember, all the income in the account is tax-free.
Start a Health Savings Account for Your Future
Whether you have an immediate need or recognize the intelligence of investing in your future medical costs, starting a Health Savings Account today would be a smart investment.
Our partners at Bank.com can help you assess the proper strategy for you to take advantage of the tax savings involved with a Health Savings Account and set up an investment strategy for your future.
