I saw a disturbing statistic: over 50% of families text each other while they’re in the home together. I text my 17 year old daughter to tell her when dinner is ready- hey, it keeps the peace! But it’s poor communication.
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I’ve noticed another area of personal finance that is poorly communicated: your ability to invest on a tax-free or tax-deferred basis is becoming more difficult. The tax code is cutting back or eliminating your options for investing in a tax advantaged way. I’ve also written recently about consumer issues with Medicare and the Affordable Care Act. One great way to accumulate assets and defer taxes is to use a Health Savings Account (HSA).
How to qualify
To qualify for an HSA account, you need to have a high-deductible health plan (HDHP). These health plans have lower monthly premiums, but the tradeoff is that your deductible amounts are higher. Currently, the IRS defines a HDHP as a deductible of at least $1,300 for a single person ($2,600 for a family).
The out-of-pocket maximum is the most the insured person pays for medical expenses in a year. Any amount over the maximum is covered by the insurance policy. To quality for an HSA, a HDHP must have an out-of-pocket maximum of $6,500 for a single person ($13,100 for a family). You cannot be covered by any other medical coverage, such as Medicare or a private insurance plan. Finally, you cannot be a dependent on someone else’s tax return.
The purpose of an HSA
An HSA account is a vehicle to save for current and future medical expenses, and you can typically open an HSA account through a bank or insurance company. Your contributions into the account are tax deductible, which makes sense, because you’re setting aside dollars to cover medical care. Here are the contributions limits as of 2017:
- $3,400 single person
- $6,750 family
- $1,000 additional annual contribution for those over 55 years old
The dollars in your account grow tax-deferred, meaning that you don’t pay income tax while in funds are in the account.
Taxation on withdrawals
The money you withdraw from your HSA are tax-free, as long as your use the funds to pay for qualified healthcare expenses, such as preventative care or prescription drugs. Check out IRS Publication 502 for more details on medical expenses that qualify.
Once you turn 65 years old, you can withdraw funds for any purpose, and you simply pay ordinary income tax on the dollars you withdraw. Another great feature is that your HSA can cover medical expenses, regardless of where you work. This portability feature makes funding an HSA account attractive.
The 4 reasons to fund an HSA:
- Tax deductible contributions
- Tax deferred dollars in the plan
- Tax-free withdrawals for qualifying medical expenses
- Use dollars for other purposes after age 65
Action Step to Consider:
Take a look at your annual out-of-pocket medical expenses. Do you have the available funds to contribute to an HSA? Since the funds accumulate over time, you’ll have funds in the account to cover an unexpected medical expense down the road.
This information is for educational purposes only. As always, consult with a financial service professional and a CPA for specifics.
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
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Stethoscope Dr Farouk (CC By 2.0)