Can you benefit from a Health Savings Account?
Health Savings Accounts (HSA) are designed for a triple tax benefit.
1. Contributions are tax deductible
2. Accounts can grow tax free. (You can accumulate dollars in this account.)
3. Disbursements for qualified medical expenses are tax free.
Health Savings Accounts are growing in popularity. The total number of HSAs grew to 25 million in 2018, up 13% from 2017 according to Devenir Research. Many financial advisors are using them as another savvy strategy for stashing money away for your retirement years.
To qualify for an HSA account, you have to have a High Deductible Health Plan. For 2020, those minimum plan deductible amounts are:
Self only – $1,400
Family – $2,800
The plan’s maximum out of pocket expenses are
Self only – $ 6,900
Family only – $13,800
The maximum amount you can contribute to an HSA in 2020 is:
Self only – $3,550
Family – $7,100
You are allowed an additional $1,000 catch-up provision if you are 55 years or older. If your family has 2 members over 55, you will need a second HSA account to maximize the total contributions of $9,100. ($7,100 family + 2 x $1,000 for over 55.)
HSAs are owned by an individual. While it may benefit a family, it is never owned jointly.
Employer contributions aren’t income to employees but do count as part of the contribution limit. Your contributions will show on your W-2.
You may open your own HSA if your employer doesn’t provide one. The same health insurance plan requirements apply. You will take your contribution as a deduction on your tax return.
Family contributions require kids age 19 to 26 to be a dependent
– Full time student
– Provide more than 50% of support
This is different from the Affordable Care Act insurance rules.
Contributions made by 4/15 can count as prior year deductions. The administrator needs to be informed which tax year the contributions should be applied. Most employer plan contributions are on a calendar year.
HSAs are portable. This is a great feature. You can begin with one employer and roll HSA assets to another employer – similar to 401(k)s. You can also roll to a stand-alone HSA.
You may consider making HSA contributions AND paying your medical expenses out of pocket. This allows your account to continue to grow. Medical costs are increasing faster than inflation. You have the opportunity to accumulate tax free dollars to pay medical expenses in retirement helps your cash management in later years.
Or you can reimburse yourself later for those expenses and take a family vacation or pay for a home remodel project.
HSAs can be used strategically in your financial plan today and in the future.
For more reading on this:
Is a Health Savings Account for You?
Pros and Cons of FSAs and HSAs – Part I
Pros and Cons of FSAs and HSAs – Part II
Pros and Cons of FSAs and HSAs – Part III
Impact of Your Health on Your Wealth
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