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According to the US Treasury, Health Savings Accounts (HSA) were created in 2003. Health Savings Accounts are a tremendous tool available with High Deductible Health Insurance Plans (HDHP). As you review your benefit options or look for new insurance plans, there are a few things you should know about Health Savings Accounts before making a final health insurance decision. You health insurance provider can tell you if your insurance policy is classified as an HDHP which is eligible to have an HSA account.
Tax Deduction – contributions made to an HSA are deducted from your taxes in the current year. There is no income limit imposed for deducting contributions from your taxes on form 1040. Additionally, you do not have to itemize your deductions to include it as a deduction.
The IRS Limits for 2016 are:
Minimum annual deductible
Maximum annual deductible and other out-of-pocket expenses*
Maximum HSA Contribution
Catch-up Contribution (over 55)
Consult a professional regarding your personal annual contribution limit. Limits can be reduced because of time frames for eligibility in any given year or enrollment in Medicare at age 65.
Tax free withdrawals – All withdrawals made for qualifying medical expenses as defined in publication 502 from the IRS, are tax free. The distribution from the HSA is not taxed in any way. Since the contribution was also deducted from your income, every dollar spent on qualified medical expenses is tax free.
Can be invested for future growth – Depending on the custodian chosen, you are able to invest your savings in the HSA in mutual funds, stocks, bonds, or ETFs. This provides a potential long term benefit.
Tax Free/Deferred growth – Unlike the “Use it or lose it” policy for most Flexible Spending Accounts, the balance in the HSA is your money being saved for current and future medical expenses. For that reason, you never lose the balance in the account. If the account has a balance that is invested, the growth in the investments over time is tax free when used to cover qualified medical expenses. If the money is withdrawn from the portfolio for any other reason, then a withdrawal penalty plus income tax or just income tax is applied to the distribution.
No withdrawal penalties after 65 – As mentioned above, some distributions may only have income tax applied to them. If you are over the age of 65, the balance in the HSA can be withdrawn for any reason without penalties. Any amount withdrawn that is not used for qualified medical expenses would be included in your tax return for the year of the withdrawal. The balance in the HSA essentially becomes an IRA that can be used for cash flow needs other than medical expenses.
Portability – The HSA balance is maintained by you and contributed to by you. As such, it is your account and your money. When you change employers or retire, the money saved in your HSA moves with you.
Health Savings Accounts can be a tremendous asset and tool in the long run. You should evaluate the potential opportunity for using an HSA in your Health Insurance decisions. You are able to have more discretion over how you choose to spend your money allocated for health care expenses. There are items that the HSA can be used for that traditional health insurance will not pay for such as glasses and contacts. Many custodians offer a debit card to be used with the account, so you are able to easily access the funds for your medical expenses. Additionally, many employers provide a contribution for their employees that choose the insurance option with the HSA Account.
Some of the questions to consider are:
How often do you go to the doctor? How much could be added to the HSA if you choose the lower premium health insurance option? What amount (if any) does my company contribute to my HSA for my benefit? What other types of needs can the HSA funds be used for?
We are always happy to discuss any financial questions that you may have.
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