Some time ago when HSAs first became law in December of 2003, opponents touted the plans as "only for the healthy and the wealthy". This couldn't be further from the truth. You don’t have to be wealthy to be smart with your health care dollars. If you have medical bills, be wise and pay for them with tax- free funds.
Anyone who wants to make life a bit less stressful should consider looking into opening a health savings account for medical costs.
Take the following quiz to see if an HSA can help you:
Lowering Your Insurance Premiums
Typically, an insurance policy that works with an HSA has a higher deductible than a traditional plan, and also carries a lower premium. The monetary difference you save in purchasing the high deductible plan can be put away in your HSA and used to pay for future medical expenses. A real world example is one that looks like this:
Your current plan has a $1,000 deductible and you pay $300 a month. The HSA plan has a $2,500 deductible and you pay $225 a month. The savings in monthly premiums is $75. This amount can then be deposited into your HSA bank account. After 12 months, you would have saved $900 in premiums!!!
That money now sits in your HSA earning tax-free interest, rolls over year after year, is ready to be spent on any necessary medical costs you may have, and can be pulled out as taxable income at age 65 for supplemental retirement income.
Reducing Your Taxable Income
Any money you deposit into your health savings account reduces your taxable income. Two options to consider when funding your account are whether to fund it pre-tax, or post-tax. You can set up “pre-tax” contributions through your employer (through a section 125 or cafeteria plan) or you can claim any “post-tax” HSA contributions you made when you file your taxes.
Both of these methods effectively reduce your taxable income by the amount of your annual HSA contributions. This is a great way to reduce your tax liability, while simultaneously setting aside money to pay for upcoming healthcare expenses in the future!
Paying For Medical Expenses Tax-Free
Because HSAs are regulated by the IRS, there are a few guidelines that need to be followed. One example would be what you can spend your money on. We refer to these “sanctioned costs” as eligible HSA expenses. Once the money is deposited in your HSA, you can use it for healthcare costs relating to medical, dental, vision, pharmaceutical, alternative healthcare, etc. This can be for yourself, your spouse and any dependents regardless of the type of health coverage they have, or even if they don’t have any coverage at all. Again, all of the money that is spent on these eligible HSA expenses is spent tax-free.
See the flyer below for examples of what qualifies as an eligible HSA expense:
Eligible HSA Expenses
Saving Money for Retirement
Health savings accounts are actually an excellent retirement vehicle. In fact, they’re sometimes referenced to as “Medical IRAs”! For example, if you have a particular year with few medical bills, you can still make deposits to your health savings account for all the tax benefits. In addition, the money you don’t use in any given year carries over (rolls over) to the next year, unlike a Flexible Spending Account (FSA). This allows you to build a strong balance in your HSA that not only earns tax-free interest while the funds aren’t being used, but can also be invested in stocks, bonds and mutual funds as well!
Another key difference from the FSA that makes the HSA a great retirement savings option is that the money in your HSA belongs to you, not your employer. If you change jobs, start or stop your insurance coverage, move across the country, etc. your HSA follows you, much like a 401(k)!
Even when you turn 65, you can continue to use the money for eligible medical expenses tax-free. You can even pay Medicare or LTC premiums, or you can withdraw the funds from your HSA and count it as taxable income to take a trip, or spend it on anything you choose. It is your nest egg. You saved it, you earned it.
So, if you answered “yes” to any of the questions above, an HSA may really be beneficial to you and your healthcare situation! If you have any questions about any of the topics we covered here, please feel free to let us know in the comments below, or contact our office. HSAs are what we do, and we look forward to hearing from you!
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