Unexpected medical expenses can derail your finances. We all hope that we live a healthy and long life, but injuries and medical issues frequently pop up along the way.
Most people are enrolled in a health insurance plan that will help cover these medical costs. Whether it’s offered through your employer, a personal health plan, or you are enrolled in one of the federal programs such as Medicare or Medicaid.
But one of the most tax efficient ways to cover medical expenses is to enroll in a health savings account (HSA). In order to qualify for an HSA plan, you need to be in a high deductible health plan (HDHP). As of 2021, the IRA has defined a HDHP as a plan with minimum deductibles of $1,400 if you are single and $2,800 for families.
Worth noting the IRS also states that your total out of pocket medical expenses for a year does not exceed $7,000 if you are single and $14,000 if you have a family.
These higher deductible plans can be great for people who are generally healthy and do not anticipate any major medical expenses. So how can you benefit from enrolling in an HSA plan?
An HSA can almost be categorized as an IRA for healthcare. But there are several benefits. First off, there is no phase out on contributions. Meaning, if you make $1 per year or $1,000,000, you are eligible to contribute $3,600 if you are single and $7,200 if you have a family. Also, in order to qualify for an HSA plan, you can be self-employed or a W2 worker.
These pre-tax contributions are deductible on your tax return and can help reduce the amount of taxable income. Additionally, these contributions grow TAX FREE in your HSA plan and you have a lot of flexibility in how you invest this money. Finally, you can take the money out at any point in order to pay for qualified expenses TAX FREE.
Here is a list of “qualified medical expenses”: https://www.payflex.com/ (scroll towards bottom).
Not often do you see an investment vehicle as a “triple tax threat”.
Other Key Points:
- If you have an HSA plan and pass away with funds still in the plan, your spouse is allowed to be named the beneficiary and she will inherit the plan.
- If someone other than your spouse is the named beneficiary, the beneficiary will be taxed on any remaining funds in the year that you pass as ordinary income.
- After the age of 65, you can take penalty-free distributions from the HSA for any reason. For example, buy a boat or buy whatever your heart desires. However, in order to be tax-free, the distribution must be for a qualified medical expense. Withdrawals made for other purposes will be subject to ordinary income taxes.
- These plans will come with an actual debit card that you can use when paying.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.