Health Savings Account
4 Little-Known Ways a Health Savings Account (HSA) Can Benefit You
There’s really no debate what so ever, a health savings account has many tax benefits and advantages for you and your family. If your current health insurance plan is a high deductible one, then an HSA can be used to pay your medical bills. It doesn’t end there though, there are several other valuable features that can create a lot of tax-free money you can use for retirement or some other worthwhile purpose.
There’s even a way an HSA can be used to give your young adult children a boost to begin saving for their future. However, it should be mentioned that an HSA isn’t for everyone. In order for you to qualify for one, your health plan must have a minimum deductible of $1,400 for one individual and $2,800 for a family plan.
Some high deductible medical plans have an even higher minimum before their coverage starts. Many individuals find that to be a financial hardship, especially in the current economic situation. If you find yourself in that situation, you shouldn’t try to scrimp on your health care. For the time being, it might be better to get a health plan you can afford, and skip the health savings account.
If you can handle the high deductible policy requirements, it will take extra cash if you plan to take full advantage of an HSA. By that we mean having enough cash to pay the deductible as well as other medical expenses, out of pocket. It’s a lot to ask, but the benefits of having an HSA are worth it. Following are the four (4) largest advantages that are available to you.
A health savings account gives you triple tax benefits
First of all, the contributions that you make are deductible. Secondly, the account balance grows as a tax deferred instrument. Thirdly, your withdrawals aren’t taxable income as long as you have qualified medical expenses that equal or exceed the amount taken out.
If you compare the HSA to other tax advantaged accounts such as a traditional IRA or a 401(k) plan, your withdrawals become taxable income. A Roth IRA withdrawal isn’t taxable income, but the drawback is that the original contribution wasn’t deductible, so no tax break there.
You’re not required to make HSA withdrawals
If you don’t spend the money in your health savings account, it can simply be rolled over every year. Compare that benefit to a flexible spending account, which is another tax advantaged way to pay for your medical expenses. An FSA requires you to spend the money within a certain time frame, or those contributions can be forfeited. It’s the old term “use it or lose it!
For 2021, you are allowed to contribute $2,750 for an individual, but in contrast, you’re allowed to contribute $3,600 for an individual and $7,200 for a family to a health savings account. Plus, an additional positive feature is if you’re over age 55, you can take advantage of the catch-up contribution of an additional $1,000.
The funds in an HSA can be invested instead of sitting in a bank savings account paying a measly interest rate of 0.15 per cent. By investing these funds, the account balance can really grow – and tax deferred as well.
Withdrawals from an HSA are potentially tax free
As long as you have qualified medical expenses and that also includes your health insurance deductibles and all co-payments, the distribution is tax free. The IRS maintains a list of these expenses and they are quite comprehensive. What you need to look out for is to make sure there’s no double dipping.
That means, an eligible medical expense that was reimbursed by other insurance or a Flex account, can’t be used as a tax-free distribution. Another fantastic feature of a health savings account, is that a distribution from the HSA doesn’t have to be made in the same year as the distribution.
The only requirement by the IRS is that your medical expense was incurred after you opened and funded the HSA. Your distribution for reimbursement can be in the same year or it can be ten years later. Just be sure to keep your eligible medical receipts in case of an audit.
Sometimes the receipts can fade over the years, so it is probably a good idea to make digital copies of them and store them in a folder by year.
An HSA can be used to get your child’s retirement started
Normally, when your child reaches 19 years of age, or is a college student and age 24, you can’t claim them as a dependent for tax purposes. However, under the new rules, a child can stay on the parent’s high deductible medical insurance until age 26.
This feature gives the parents a financial planning opportunity. Even though the child can’t be claimed as a dependent after age 24, but is still covered on the parent’s insurance, he can open his own health savings account. This window gives the parents an opportunity to gift the child their account or just a part of it to fund his own HSA.
Using this option gives the child a tax deduction for the contribution and probably many years of tax deferred growth. This is a really smart strategy to use in setting up a health savings account for your child.
Conversely, though, as long as the child is still claimed as a dependent on the parent’s tax return, he’s not permitted to set up his own HSA. Plus, once the child is no longer a dependent, his eligible medical expenses can’t be used to make a tax-free distribution from the parent’s HSA.
Summary
Using your HSA in this manner isn’t for everyone. But, for those who can afford to, it’s a good way to provide another source of tax deferred money that can be used for retirement spending. Plus, the fact that the health savings account money can be invested, the growth provides for additional money that can be used tax free for the higher medical costs in retirement.
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Gust Lenglet – Platinum Author
