HSA’s are a “Triple Threat”

Medical costs are never fun, and they don’t seem to be getting any cheaper, but what if there was a way to save money for your medical expenses, save on taxes, and save for potential retirement expenses, all at the same time?  Well guess what?!  There is!


A Health Savings Account or (HSA) is a way for you to save money for medical expenses without paying taxes or interest on the dollars you contribute to the account(s).  The funds you save into your HSA go into the account before taxes are taken out, which allows you to contribute more money, which means you can cover more medical expenses than you could with after-tax dollars.


So, sounds like something everyone should be taking advantage of, right?  Well, here’s the kicker… Not every person is eligible to contribute to an HSA.  Only individuals who are covered under a high deductible healthcare plan, are not enrolled in Medicare, and those who are not being claimed as a dependent on another person’s tax return can contribute to an HSA.


So how do you know if your healthcare plan is considered “High- Deductible?”


For tax year 2019, an individual healthcare plan participant must have a minimum deductible of $1,350 or higher, and $2,700 minimum deductible if you’re on a family plan.  If it’s at or above those two limits, then it’s considered a high deductible plan and you are eligible to take advantage of an HSAs as long as you are eligible under the other previously mentioned criteria.


Let’s say you are HSA-eligible.  It’s important to understand what medical expenses qualify for HSA withdrawals because you can get hit with a 20% tax penalty if you don’t use the money for the correct expenses.  According to the IRS, medical expenses are defined as the “costs of diagnosis, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of your body.”  It also includes cost of equipment, supplies, and diagnostic devices needed for those purposes.  The list is pretty long, so if you want to know more, feel free to check out the IRS website by CLICKING HERE.


It seems like you can cover a lot of medical expenses with your HSA savings, so why not just pile as much money in there as you can, save on taxes, and bank that money for when you need to pay for medical expenses?  Well to an extent, you can… but unfortunately the IRS also sets some limits on how much you can put into your HSA.  For 2019 the maximum savings limit for individuals is $3,500 and for a family it’s $7,000.  However, even with these limits, HSA contributions can still save you a significant amount on your tax bill.


Let’s look at an example of a Susan – a single plan participant using the above maximum contribution ($3,500): Susan makes $90,000/year and chooses to max out her HSA because she tends to visit the doctor more than she would like for various medical issues. Keeping it simple, let’s say she’s in the 24% tax bracket.


Susan will be able to can use the $3,500 toward her medical expenses this year AND will save $1,246 in taxes while doing so.


Now, to round out the “Triple Threat,” let’s say Susan builds up a large HSA account balance over the years because she never spent all the money she put into the account.  When she turns 65, that 20% tax penalty for taking money out of the account for expenses other than qualified medical expenses no longer applies.  Even though she’ll have to pay income taxes on the money, she can still use that money in retirement, just like she can use her 401k withdrawals!


To add a cherry on top, her tax bracket in retirement is likely to be much lower than it was when she was employed, so she’ll pay lower taxes on the money she withdrawals from her HSA, further maximizing those original dollars.


So, if you are covered under a high deductible healthcare plan, make sure you’re taking advantage of a Health Savings Account.  It’s a small way to make a big different in both your current and future financial life.

Categories: Educational Articles, Zak Leedom

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