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Need A Last-Minute Deduction Before April 15th? A Health Savings Account (HSA) Is Here To Save The Day
Facing a tax bill that was higher than expected? Establishing a Health Savings Account (HSA) may provide you a last minute deduction that can pump up your wallet even more. This above the line deduction comes with no income limits or phase-out’s, making it especially attractive to high-bracket tax-payers.
Why are HSA’s suddenly such a smart opportunity?
The passage of the Affordable Care Act (Obamacare) has changed how many Americans seek out and pay for health care. Companies and individuals that choose a High Deductible Health Plan (typically a minimum deductible of $2,700 for a family) are eligible to enroll in a Health Savings Account (HSA) to help save for medical expenses. A Health Savings Account is a tax‐advantaged account that you can use to pay for current or future IRS‐qualified medical expenses. Unlike popular Flexible Spending Accounts (FSA), with an HSA there is no “use it or lose it” provision – meaning you have the ability to invest your healthcare savings and earn a return over time.
Why is an HSA so compelling? A triple-threat of tax benefits
An HSA provides tax savings in three ways. Here’s how:
- Contributions to your HSA are made with pre-tax dollars (deducted from a paycheck) or any after-tax contributions are deductible; therefore any HSA contributions reduce taxable income
- HSA account interest and investment earnings are tax-free
- When used for IRS-qualified medical expenses, distributions are tax-free.
HSA deductions are above the line and can help you shrink your adjusted gross income or modified AGI before the calendar strikes April 15th. Notably, there are no income limits and no phase-out’s for HSA tax deductions. This means that HSA contributions can help affluent investors who have been phased-out of tax benefits, and also minimize their exposure to the 3.8% surtax on net investment income. For 2017, The IRS permits tax-deductible HSA annual contributions of $4,450 (individual) or $7,900 (family), with a $1,000 extra allowed for those over 55. However, you are no longer eligible for an HSA account once you have enrolled in Medicare.
In its most basic use, an HSA saves you money by allowing you pay for current health care expenses using pre-tax dollars. With a little luck, or good planning, an HSA can also be treated as a “Medical IRA.” Let’s say you have several years when your medical bills are low, or you can pay for your health care expense out of pocket – then the balance in your HSA can continue to grow, untaxed, for future use. In retirement, these funds can be used toward medical expenses with untaxed dollars. Retirees being forced to draw form their Traditional IRAs to fund expenses, which raises their taxable income, can benefit from having a tax-free bucket of earnings available from their HSA.
So you plan to build an HSA for the long-term; now how will you invest it? According to a recent report by Fidelity, only 16% of HSA owners had invested their account beyond cash and cash equivalents. Once a sufficient base of liquidity is established in an HSA, it could pay to invest and aim for a higher return. Keep in mind that HSAs are portable, even without a job change. Ask your employer if your HSA provides a menu of investment options. If not, it’s worth exploring other providers that do.
For further guidance on how to immediately capitalize on an HSA by the upcoming April 15th deadline; or to benefit from additional HSA investment options, call us or use the Let’s Talk tool in the sidebar. We can determine how an investable HSA might be right for you.
The Key Takeaway
An HSA can save your (tax) day. If you’re currently enrolled in a High Deductible Health Plan, chances are an HSA can save (and earn!) you far more money in the long term.