Health savings accounts, or HSA's, are individual bank accounts owned by employees or self employed individuals that allow for tax free payment or reimbursement of eligible medical expenses.
HSA Highlights/Advantages:
HSA's In general:
These accounts work in a manner which is very similar to an IRA account but they are for out of pocket medical expenses. Qualifying individuals can deposit funds to the account, take a tax deduction for the funds deposited, and then withdrawal the funds tax free to pay qualified medical expenses. You might be thinking, "wouldn't it be easier just to deduct your medial expenses instead?" Well, yes it would but that isn't they way congress has written the laws. As things stand now you can only deduct medical expenses that exceed 10% of your income. For most people that means that they can't deduct any medical expenses at all. Health Savings Accounts are a good way to convert these otherwise non deductible medical expenses into deductible ones.
The Rules:
No permission or authorization from the IRS is necessary to establish an HSA. You set up an HSA with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.
For tax year 2016 an individual with self-only coverage can contribute and deduct up to $3,350. A contribution and deduction of up to $6,750 is allowed for a family coverage plan.
What's the catch? Well, there are a couple of them. First, to have a tax advantaged Health Savings Account you need to have a qualifying high deductible health insurance plan. The plan must have a deductible of no less than $1,300 for self-only or $$2,600 for family coverage. Additionally, the plan must meet the maximum out of pocket rules. The most that a plan participant can be required to pay our of pocket cannot exceed $6,550 for self coverage or $13,100 for family coverage. Typically, qualifying high deductible plans have lower monthly premiums but higher out of pocket costs associated with them. The Health Savings Component is mean to help you cover those higher out of pocket costs.
To receive tax free distributions, the proceeds must be used for qualified medical expenses. If HSA funds are used to pay for unqualified expenses the distribution will be included in income and will also be subject to a 20% penalty. After you reach age 65 and become eligible for medicare you can take distributions from the account for non medical purposes without incurring the 20% penalty; however, the distributions will be subject to tax.
Retirement Planning - How to Utilize Your HSA in Retirement:
Once you become medicare eligible you are no longer qualified to make contributions to your HSA. But, you can still utilize your Health Savings Account. In fact, an HSA is a valuable asset in retirement providing useful benefits. If you are fortunate enough to remain relatively healthy during your working years and don't incur a lot of medical expenses, you could build up a significant balance in your HSA. You can continue to use this account balance for medical expenses as they occur. Your distributions will remain tax free to the extent that you are reimbursing medical expenses. What you don't use for medical expenses can be withdrawn just like regular IRA withdrawals with no penalty. You will need to pay income tax on the non medical distributions, just as you would with a traditional IRA.
HSA Highlights/Advantages:
- Tax Deductible Contributions
- Tax Free Growth on Account
- Tax Free Distributions for Qualified Medical Expenses
- Can be used as a Traditional IRA after age 65 (or Medicare Eligibility)
HSA's In general:
These accounts work in a manner which is very similar to an IRA account but they are for out of pocket medical expenses. Qualifying individuals can deposit funds to the account, take a tax deduction for the funds deposited, and then withdrawal the funds tax free to pay qualified medical expenses. You might be thinking, "wouldn't it be easier just to deduct your medial expenses instead?" Well, yes it would but that isn't they way congress has written the laws. As things stand now you can only deduct medical expenses that exceed 10% of your income. For most people that means that they can't deduct any medical expenses at all. Health Savings Accounts are a good way to convert these otherwise non deductible medical expenses into deductible ones.
The Rules:
No permission or authorization from the IRS is necessary to establish an HSA. You set up an HSA with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.
For tax year 2016 an individual with self-only coverage can contribute and deduct up to $3,350. A contribution and deduction of up to $6,750 is allowed for a family coverage plan.
What's the catch? Well, there are a couple of them. First, to have a tax advantaged Health Savings Account you need to have a qualifying high deductible health insurance plan. The plan must have a deductible of no less than $1,300 for self-only or $$2,600 for family coverage. Additionally, the plan must meet the maximum out of pocket rules. The most that a plan participant can be required to pay our of pocket cannot exceed $6,550 for self coverage or $13,100 for family coverage. Typically, qualifying high deductible plans have lower monthly premiums but higher out of pocket costs associated with them. The Health Savings Component is mean to help you cover those higher out of pocket costs.
To receive tax free distributions, the proceeds must be used for qualified medical expenses. If HSA funds are used to pay for unqualified expenses the distribution will be included in income and will also be subject to a 20% penalty. After you reach age 65 and become eligible for medicare you can take distributions from the account for non medical purposes without incurring the 20% penalty; however, the distributions will be subject to tax.
Retirement Planning - How to Utilize Your HSA in Retirement:
Once you become medicare eligible you are no longer qualified to make contributions to your HSA. But, you can still utilize your Health Savings Account. In fact, an HSA is a valuable asset in retirement providing useful benefits. If you are fortunate enough to remain relatively healthy during your working years and don't incur a lot of medical expenses, you could build up a significant balance in your HSA. You can continue to use this account balance for medical expenses as they occur. Your distributions will remain tax free to the extent that you are reimbursing medical expenses. What you don't use for medical expenses can be withdrawn just like regular IRA withdrawals with no penalty. You will need to pay income tax on the non medical distributions, just as you would with a traditional IRA.
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