Open Enrollment is Here! Is an HSA Right for You?
Choosing a health plan to ensure adequate health coverage can be one of the most important decisions made all year. One option becoming more popular is the Health Savings Accounts. A Health Savings Account (HSA) is a tax advantaged account available to any persons with a high deductible health plan (HDHP). They are becoming more common as deductibles continue rising and can be a powerful asset if it’s the best decision for you. One of the best parts about them is they have a triple tax benefit:
- Tax deductible contribution
- Tax free earnings and gains
- Tax free withdrawals for qualified medical expenses.
Two Ways to Open a Health Savings Account
- You can have a HSA through your employer (if it is offered as a benefit option) and have your pre-tax contributions made directly from your pay (saving you FICA, State and Federal taxes)
- You can open a HSA directly with an HSA provider on your own. (as long as you have a high deductible medical plan)
Contributions
You can make pre-tax deductions through your paycheck or you can make contributions with after-tax dollars which you can deduct from your gross income on your tax return thus reducing your tax bill for the year.
HSA contributions limits for 2020 are as follows:
- $3,550 for an individual
- $7,100 for a family
- There is a $1,000 catch up contribution if you are over age 55.
- If you have more than one HSA, the limit applies to the combined total
- Contributions are due by the tax filing deadline of April 15th the following year
There is no required minimum distribution (RMD) at age 72 or “use it or lose it” clause like there is with an FSA (Flexible Spending Account). An HSA has two sections in the account: a cash portion and an investment portion. Contributions you intend to use in the short-term for health expenses should be held in cash. However, if you can cover your health expenses out of regular cash flow, you can invest a portion of your HSA for long-term growth to use in retirement.
Like a 401k, there is a limited menu of options available that differs with each HSA provider. However, many providers have started offering to customers the ability to open Health Savings Brokerage Accounts directly through the HSA website. These accounts give access to all investment options through the broker’s platform (be it Schwab, TD Ameritrade, etc.) to create more customized allocations.
Distributions
HSA monies can be used tax free now or in the future for qualified medical expenses. For a complete list of qualified medical expenses, see the post from the HSA Bank Learning Center.
Tip: HSA dollars can be used to pay long term care premiums!
One very important rule to note is that there is a 20% penalty for a non-qualified withdrawal on top of the income tax and any tax on the earnings. You want to be sure your medical expense is qualified before making a distribution. If you are over the age of 65 there is no longer a penalty, but you will owe income tax on the withdrawals.
HSA accounts are portable, which means that you can take them with you if you leave a job. They can be transferred or combined with other HSA accounts.
Most HSA providers issue a debit card that can used to make withdrawals. (It is recommended that you keep copies of your receipts as proof of your qualified medical expense)
How PDS Can Help
As always, PDS is here for any questions that may arise while evaluating potential health plan options. Since 1985, PDS Planning has worked with clients to eliminate the stress often associated with planning your financial future. We will listen to your questions and concerns and work to provide objective guidance to fit your specific planning needs. With over 30 years of experience helping clients plan their financial futures, we’re experts at optimizing an investment plan to each individual’s highly specific needs.
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