It’s open enrollment season in the USA and health insurance prices have skyrocketed, as expected. Most of us are looking for ways to maximize our dollars and minimize our risk. I’m not saying that a Health Savings Account (HSA) is the right answer for you, but I am saying everyone should at least look into it, even the self-employed. If you have or are considering a High Deductible Health Plan (HDHP), you probably qualify. Read on for more details.
What’s an HSA?
This is a special account for current or future medical expenses with MEGA tax benefits, flexibility, and investment options. Contributions can be made from an eligible individual, an employer, or any other person. The person owning the HSA account gets the tax deduction, even if you don’t itemize.
So What’s the catch?
Well, you can’t be on Medicare or be able to be claimed as a dependent on someone else’s tax return. You also must be covered under a qualified High Deductible Health Plan (HDHP) and you can’t be covered by other health insurance that isn’t HDHP. There are a few exceptions to this like dental, vision, long-term care, etc. You can check out this
Also, if you have another employee health plan like a Health FSA or HRA that pays for medical expenses, that might disqualify you. It depends, though. If it’s a limited-purpose or a retirement HRA, you might still be able to to use an HSA. Check out the IRS website for more details.
If none of those sound like you, then you should be eligible. That means employees and self-employed individuals can use one!
Employees can either take an above-the-line-deduction or make contributions through their employer on a pre-tax basis through salary reduction. Self-employed people can take an above-the-line-deduction for contributions.
7 Reasons Why You Want One:
1) Unlike the FSA, the funds in your HSA roll over each year. There’s no use-it-or-lose-it penalty. If you are an employee, you can change your contribution amount as often as your employer allows. If you’re self-employed, you decide when and how much you’ll contribute. You have the power over your account.
2) Triple tax savings! Your contributions are tax-deductible, your earnings and interest are tax-free, and your withdrawals for eligible medical expenses are tax-free.
3) It’s a lot like an IRA because you can invest in stocks and index funds and let your money grow. As long as you spend it on qualified medical expenses, you’re golden. If you wait to take it out until after age 65, you can even use it for non-medical expenses and just pay income tax.
4) There are a lot of HSA options, including this one that lets you invest in 22 Vanguard funds without the typical minimum investment requirements. There are annual contribution limits, though, regardless of who you hold your account with. The max you can invest in 2017 is $3,400 for individuals and $6,750 for families.
5) It goes wherever you go, unlike an FSA. If you leave your job for a new one or to go freelance, there’s nothing to change and you don’t lose any money. Your account is your account. As long as you still have a qualified HDHP, you can keep contributing to it and/or
6) You can still use your HSA funds after you’ve left your HDHP. If you leave your HDHP, you are not eligible to contribute any longer, but you can still use it to redeem medical expenses.
Ex: Say you’ve been saving money to your HSA for a couple of years and then you get pregnant and your HDHP no longer makes sense for you. You switch to a more traditional health insurance plan and can no longer contribute to your HSA. However, you can still use what you’ve already contributed for your health expenses for your, your spouse’s, and your dependents’ medical expenses
7) There’s no deadline for reimbursement. Ever. If you want, you can pay your medical expenses out of pocket and let your HSA investments grow for years untouched. Make sure to keep your receipts and reimburse yourself when you are ready.
A Word of Warning
If you use your HSA funds for something else before you’re 65, watch out! If you take it out for non-medical expenses before 65, you’ll pay a 20% penalty plus income taxes.
Also, check the IRS for a list of medical expenses that are qualified. For instance, cosmetic surgery is not a qualified medical expense.
One last thing. If you’re not very healthy or tend to go to the doctor a lot, an HDHP paired with an HSA may not be the choice for you. If you are sick or have a big surgery planned, it might make sense to use a more traditional health insurance.
Remember, you can still use your already accumulated HSA funds even if you aren’t on an HDHP, you just can’t make more contributions. You can always switch back to HDHP after your recovery and start contributing to your HSA again.
What to Do Next
If you enjoyed this post, be sure to like and share it with others that might find this information useful. HSA popularity has grown significantly over the years, but a lot of people still don’t know about them and what they can do for you.
I’m not a financial advisor or CPA, so before making any major financial changes, please talk to your financial advisor and make a decision that’s best for you and your unique situation.
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Good luck and stay healthy this season!