The annual cost of providing healthcare for a family of four hit $25,826 in 2016, which is triple what it cost in 2001. That total includes $14,793 of employer contributions, $6,717 of employee-paid premiums, and $4,316 of out-of-pocket costs (1). Health care costs are not a trivial matter and can easily throw a family’s finances off track if they are not prepared. For those interested in saving towards health care costs, the government has provided an excellent tool: Health Savings Accounts (HSAs).
What is an HSA?
In 2003, the government established HSAs as a way for people covered under high-deductible health plans (HDHPs) to get special tax treatment for saving money for medical expenses not paid for by their insurance. With an HSA, individuals receive a tax benefit for saving money to cover their deductible. As HDHPs gained in popularity, the government wanted to incentivize saving to cover the higher deductibles, so that medical events would not be financially devastating even with insurance in place.
Two Unique Benefits Of HSAs
There are two aspects of an HSA that make it especially appealing:
You can contribute money to your HSA pre-tax. Because tax hasn’t been taken out, you end up with more to contribute. Many people have their HSA funds withheld directly from their paycheck so that they never even see it or have to pay taxes on it. Even if you fund your HSA with after-tax dollars and don’t have it automatically withheld you can still receive the same tax benefit in the form of a deduction when you file your taxes. Either way – save now or save later – you still save on taxes by contributing to an HSA.
Not only do you save on taxes when you put money into an HSA, you save when you take it out as well. As long as it is for qualified medical expenses, distributions from an HSA are tax-free. This makes an HSA very unique among government savings plans such as 401(k)s or Roth IRAs. Usually, you either contribute pre-tax but have to pay taxes on withdrawals, or you pay your taxes upfront before contributing and don’t get taxed on the withdrawals. Health Savings Accounts take the best of both kinds of plans to make a superiorly tax-advantaged savings vehicle.
Who Can Have An HSA?
You must meet the following criteria to be eligible to open an HSA:
- You must be covered by an HDHP (as per IRS definition)
- You cannot be enrolled in Medicare or other health coverage
- You cannot be claimed as a dependent on someone else’s tax return.
HSAs are individual accounts, not joint accounts. So, for married couples, only one spouse owns the account while the other can be given rights to it as an authorized user. When the account owner dies, their spouse may take over the account and use it as their own without paying any taxes (for qualified expenses) or penalties.
As long as an individual is covered by an HDHP, anyone may make contributions to the HSA whether it is the individual, the employer, a family member, or another third party. The 2016 contribution limits are $3,350 for singles and $6,750 for families, with a $1,000 catch-up contribution available to those over 55. Once an individual ceases to be covered by an HDHP, they are still permitted to use the funds in the HSA for eligible expenses, but they (and anyone else) are no longer allowed to contribute to it.
There is a wide range of IRS-qualified expenses, many of which aren’t usually covered by health insurance plans. Some of these are deductibles, co-insurance, prescriptions, dental and vision care. Most things that would typically qualify for the medical expense deduction on your tax return qualify for an HSA.
For people over 65, qualified expenses include premiums for Medicare parts A, B, D and Medicare HMA, the portion an employee pays for employer-sponsored health insurance and the employee portion of employer-sponsored retiree health insurance. Supplemental policies like Medigap are not considered qualified by the IRS.
Not A “Use It Or Lose it” Account
Many people confuse HSAs with FSAs, or Flexible Savings Accounts. With an FSA, any unused funds in excess of $500 are forfeited at the end of the year. HSAs are different, though. Account balances simply roll over from year to year, allowing for incredible growth and accumulation of savings. As long as you are eligible, you can continue to contribute to your account tax-free and let the money grow tax-free for use at any time in the future, whether near or distant.
Your HSA Can Earn Investment Returns
Many people don’t know that they can set up your HSA as an investment account and it can earn returns. This means that throughout the year, the funds in your account can be growing tax-free, which provides even more money for your healthcare.
How We Can Help
Here at Pangaro Wealth Management, we now have the ability to open HSA accounts! Just about anyone with an HDHP would benefit greatly from having one and we want to help. If you are interested in opening one or if you have further questions regarding how they work, call us today at (203) 439-2626. Health care expenses are inevitable, and an HSA helps you save money on taxes and be prepared for when they come. Don’t wait, there’s still time to maximize your contributions for the year and start taking advantage of this awesome opportunity!
About Pangaro Wealth Management
Pangaro Wealth Management is a Registered Investment Advisory firm providing financial planning, risk management, and retirement plan consulting for individuals, families, and business owners. Led by a team of experienced financial professionals with diverse backgrounds, the firm focuses on doing one thing extremely well and with unparalleled dedication and commitment: connecting their clients’ dreams with sound financial strategies. By collaborating as a team, they provide greater depth and more advanced strategizing to clients’ plans and needs. Deeply rooted in their community, they serve clients throughout Connecticut, reaching to Cheshire, Meriden, New Haven, Torrington, Avon, West Hartford, Farmington Valley, Vernon, and beyond. To schedule an appointment, click here. To learn more about their services, visit www.pangarowealthmanagement.com or connect with them on LinkedIn.
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