A Health Savings Account (HSA) is a relatively new savings vehicle and for that reason alone too many people do not have them. Introduced in 2008 as a way to help defray the costs of rising health care expenses they are not like Flexible Spending Accounts (FSAs) in a number of ways. If you already have an FSA with your employer you should also open an HSA to reap the benefits of both of these vehicles. Make sure to have your accountant or tax preparation service aware of your HSA for the right tax deductions.
Unlike an FSA, anyone can open an HSA through your banking institution, wealth management company or often with your employer. Essentially these organizations simply become stewards of the account, but with no real oversight on how you use them.
The Health Savings Account is a pre-tax savings account that allows you to contribute money to the account in order to pay for medical expenses for yourself or for those in your immediate family. Pre-tax, means that any contributions that are made to the account are non-taxable come tax time. In other words the tax service you use will be able to deduct these contributions from your overall income in that year lowering your taxable income.
When you make withdrawals, they are also tax-free, as long as the expense qualifies as a medical expense. These expenses are generally more inclusive than many health benefits and include items like laser-eye surgery, guide dogs, special education, a weight loss program, fertility enhancement, lab fees and much more. To qualify for a HSA you simply need to be in a high-deductible health care plan and not in an HMO among other qualifications.
Save in Good Times
This account is a great way to lower your overall income tax bracket during good times. Contribution limits started in 2008 at $2,900 and $5,800 for singles and families and have increased to $3,350 and $6,750 in 2016 with an annual catch-up allowance of $1,000 for those 55 and older if you did not maximize your account in the previous year. If you are financially secure it is a great way to build up another tax-free savings account, as the withdrawal policies for HSAs are rather liberal.
Rainy Day Withdrawals
A great way to maximize the savings in the HSA vehicles is to contribute your annual maximum, while at the same time paying for any medical expenses “out of pocket” if you are financially able. If you come upon a non-medical emergency, you can withdraw funds from the HSA at any time for any reason. However, if you have not claimed previous expenses, as long as you can provide proof, you can claim expenses at any time in the future. This allows you to continue to grow this account and offset any non-medical withdrawals in the future with pent up expenses that have gone unclaimed.
Of course, you can always withdraw from the fund to pay for medical expenses, keeping receipts for your tax preparation service to properly implement your tax savings come tax time.
Tax Preparation Implications
This account has specific tax benefits that your tax service can educate you on. From lowering your overall income to drop tax brackets to being able to “double dip” allowing you to store funds without being taxed and withdraw them tax-free for medical expenses.
Just be sure your tax preparation service is aware of your HSA account and you provide the necessary receipts to them and keep them in case you are audited.
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