With 2018 winding down, it’s helpful to review all your tax planning options. A Health Savings Account (HSA) might be easy to overlook, but it can be a dynamic way to save for future medical expenses and retirement. It has a so-called triple tax benefit; that means you can deposit pre-tax funds, let your investment compound indefinitely, and then withdraw the money to pay for qualifying medical expenses without being taxed.
It’s a sound strategy for reducing your taxable income and for paying medical bills. This pre-tax money covers most medical costs from contact lenses to costly operations throughout your lifetime, making it a prudent investment. On the other hand, some people choose to treat it like another retirement account and let the money grow for decades. In that case, the funds can still be used for medical purposes, but at age 65, funds can also be withdrawn for non-medical purposes where you will pay the tax but avoid the penalty that would apply to such a withdraw at a younger age.
You automatically qualify for an HSA if you’re enrolled in a High Deductible Health Plan (HDHP), which means your annual deductibles are at least $1,350 (single) or $2,700 (family). There is no income limit. It makes sense to fully fund your HSA this year and every year that you are eligible because unlike a Flexible Spending Account (FSA), it does not expire. In that way, it can be thought of like a tax-free personal savings account. For now, that’s as good as it gets as far as tax planning is concerned, and as we approach the end of the year, it’s powerful financial tool worth considering.
Important HSA Information
If you are thinking about adding an HSA as a tax planning tool for this year, you’ll want to talk with your CPA soon. Changes can still be made to impact your AGI and help you save for the future–whether that be health care expenses or retirement goals. Before moving forward, consider the following points:
- You must be enrolled in an HDHP at the time of your contributions. However, it remains your account for the duration of your life. Your investment will continue to grow tax-free, even if you no longer participate in a qualifying health care plan.
- Contribution limits have increased slightly since last tax season to $3,450 (single) and $6,900 (family). Ages 55 and older can contribute an extra $1,000 per year. Since the funds do not expire, they may rollover without counting toward next year’s contribution limits.
- The interest and dividends earned are tax-free, and they may be linked to an investment account of your choice. You can think of an HSA as part traditional IRA and part Roth IRA. The money you contribute is tax-deductible that year much like a traditional IRA. Then, like a Roth IRA, the earnings and withdrawals are tax-free if used for a qualifying medical expense. You can let your account grow and take out money for medical expenses or choose to pay those expenses out of pocket, allowing your funds to continue compounding.
- Keep your medical receipts and records. Your HSA can be used for co-pays, deductibles, most prescriptions, and some medical equipment. All qualified medical expenses are outlined in the IRS document Medical and Dental Expenses.
- You may change your contribution amount at any time. If you would like to reach the contribution limit for this year, it would be best to contact your CPA or HR representative soon. Contributions can be made until the tax deadline of April 15, 2019.
An HSA may seem more complicated than other tax planning strategies, but it is worth the research. It has the possibility to save you money this year and to make you money in future years. If you would like to further discuss your year-end financial goals, contact our team.