As health care costs continue to rise faster over time, families are looking for more affordable options wherever they can find them. Often, lowering their premium means raising their deductibles.
A Health Savings Account (HSA) is a way to save for medical expenses and reduce your taxable income. Think of it like an IRA for medical expenses. To cover the ever-rising high deductibles, this allows you to set aside money tax-free in a health savings account. You can use your HSA to pay medical costs until you reach the deductible threshold. At this point, the insurance coverage kicks in to cover additional expenses.
To qualify for an HSA, you must have a high-deductible health plan, also known as a HDHP. This means you have a lower premium for insurance coverage. As with all insurance, lower the risk for the insurer means lower premiums for the customer.
Like IRAs, contributions to your health savings account are deductible form your taxable income. You can deduct contributions up to $3,550 for individuals and $7,100 for families with HDHP. Taxpayers over 55 can contribute an extra $1.000 in catch-up contributions, much like with IRAs.
If you take the deduction this year, the money grows and compounds tax-free and you can withdraw it tax-free at any time to pay for medical expenses. This means you don’t have to wait until your 59 ½ to access the funds, like with an IRA.
You can only withdraw money from your HSA to cover health-related expenses. These expenses can include more than your typical doctor visits and medications. Some others include eyeglasses, contact lenses, dental care, fertility costs, birth control, bandages, hospice care, etc.
If you withdraw money from your HAS for non-qualified medical expenses before the age of 65, the IRS taxes withdrawals at the ordinary income tax rates pls a 10% penalty. After the age of 65, non-qualified withdrawals are taxed at the ordinary tax rates without the penalty.
The best part of an HSA is that the IRS places no limit on the fund balance, which can accumulate over your lifetime.
As always, if you have any questions, give us a call!
This is meant for educational purposes only. It should not be considered individual advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. (12/20)