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Should You Start a Health Savings Account (HSA)?

| March 10, 2016
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Have you considered starting a Health Savings Account? In 2003, the government established Health Savings Accounts (HSAs) as a way for people covered under high-deductible health plans (HDHPs) to get special tax treatment towards saving money for medical expenses not paid for by their insurance. With an HSA, payers were able to receive a tax benefit for saving money to cover their deductible. As HDHPs gained popularity, the government wanted to incentivize saving to cover the higher deductibles, so that medical events would not be financially devastating for those with insurance in place. HSAs offer two important benefits to consider.

Two Tax Benefits

An HSA has two unique benefits that make it especially appealing. First of all, 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 money withheld directly from their paycheck so that they never even see it and don’t pay taxes on it. Even if you fund your HSA with after-tax dollars without having it automatically withheld, you can receive the same tax benefit in the form of a deduction when you file your taxes. Either way – save on taxes now or 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.

However, withdrawals that are not for qualified medical expenses are not tax-free.  If money is withdrawn for reasons other than qualified medical expenses, it is subject to normal income tax rates and a 20% penalty if the account holder is under the age of 65.

Who is Eligible?

You would think that with such great tax treatment, everyone would have an HSA. However, not just anyone is eligible to open one. If you want to open an HSA, you must be covered by an HDHP, not enrolled in Medicare, and not claimed as a dependent on someone else’s tax return. To be considered an eligible HDHP, your plan must have a minimum deductible of $1,300 for singles or $2,600 for a family. The maximum HSA contributions are $3,350 for singles and $6,750 for families, with a $1,000 catch-up contribution available to those over 55.

HSAs are individual accounts, not joint accounts, so for married couples, only one spouse owns the account (the one through which the insurance has been acquired) while the other can be given rights to it as an authorized user. If 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 up to the IRS-imposed limits mentioned above whether it is the individual, the employer, a family member, or another third party. 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.

When setting up a Health Savings Account and deciding the best way to use it, it is important to work with a knowledgeable financial professional. If you would like to know more about Health Savings Accounts or the prudence of using your current HSA for retirement savings, we can help you evaluate your options to maximize your future without sacrificing the present. The Wealth & Pension Services Group team is here to help. Call our office anytime at 770.333.0113 x 106 or email bill@wealthandpension.com.

About Bill

William "Bill" Kring is the founder of Wealth & Pension Services Group, Inc, an independent wealth management firm serving individuals and businesses near Atlanta, Georgia. As a twenty year financial veteran, Bill offers broad expertise in wealth management services including asset management, fiduciary consulting, retirement, trust and estate planning, as well as insurance and 401(k) plan services. In his past, he competed as a U.S. Cycling Federation class III rider in both road and track. To learn more about how Bill may be able to help, visit the Wealth & Pension website, connect with him on LinkedIn, call his office at 770.333.0113 x 106 or email him anytime at bill@wealthandpension.com.

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