The Power of the HSA
Paying for medical care in the United States is one of the biggest fears that people tend to have. In fact, the leading cause of bankruptcy across the nation is medical debt. Many times, this debt is unexpected. Additionally, with the rise in deductibles in many health insurance plans, many Americans may have insurance but no way to pay for out-of-pocket expenses easily. The US government has set up a plan to help people prepare. This plan involves HSAs that are tied to high-deductible plans.
What Is An HSA?
When it comes to these three letters, many people’s first question is, “What is an HSA? Simply put, an HSA is a health savings account. These accounts are intended to help people pay for their deductibles and other out-of-pocket expenses, usually known as coinsurance. Any insurance plans that have an annual deductible of $1,350 for an individual or $2,700 for a family are eligible to incorporate health savings accounts as long as the out-of-pocket maximum expense is below $6,750 for singles or $13,500 for families.
What Are The Benefits?
The biggest benefit of a health savings account is the ability to save on a tax-deferred basis. This means that any dollars that go into the account are not subject to taxation in the current year. In other words, a person’s taxable income would be reduced by the amount of money put into the account up to the annual limit. The tax benefits do not stop there, however. The money that goes into health savings accounts is exempt from FICA taxes. For comparison, 401(k) contributions are tax-deferred, but they do not have the same FICA exemption. These are the taxes that go toward Social Security and Medicare. A person who maxes out the account each year could save hundreds on his or her tax liability.
There are even more tax benefits. The money is tax-free when disbursed as long as the disbursements are made on qualified medical expenses. Therefore, there is a triple tax benefit for HSAs. They are tax-free going into the account. They also avoid taxes when used for medical expenses. Additionally, those who hold an account are exempt from Social Security taxes on the amount that goes into the account. This is pretty unique, and it likely makes the HSA the most efficient way to cut taxes.
Another benefit that HSAs offer to Americans is the ability to ramp up retirement savings. The amount that’s left over in an account at the end of each year can roll over to the next year. While this provides a ready-made stash of cash to pay for medical expenses, the money can also go toward funding a comfortable retirement. After an account holder reaches age 65, which is the minimum age for Medicare recipients, he or she can use the money for any purpose. The money in an HSA can then go toward paying rent or paying for food or a vacation. The only taxes that will be due are regular income taxes at the taxpayer’s marginal rate. There is no penalty associated with non-medical withdrawals after age 65. Prior to this age, there is a 20-percent penalty for using the money for anything other than qualified medical expenses.
Money in a health savings account can be invested. Many companies that handle the accounts have a minimum level of cash required. Once an account holder reaches that amount, he or she can start to invest the funds. The actual investment choices will vary based upon the bank or investment firm used, but investing the money over the long run can allow the funds to grow. This will provide tax-free growth for medical expenses or for retirement should the account holder not need to use the funds for medical expenses before age 65. The money would still be tax-free if used for medical expenses after an account holder turns 65.
There is no annual limit related to how much a person can spend out of their account during a given year. Every penny is available. There are, however, limits as to how much a person could contribute in a given year. As of 2019, single folks can contribute up to $3,500 each year, and families can contribute up to $7,000, which is double the amount for singles. Employers can contribute to the account on behalf of an employee, but this counts toward the total limit. For example, if an employer contributes $1,000 for a single employee, the employee could only contribute $2,500.
HSAs are one of the best innovations in paying for medical expenses. Those who have chronic illnesses might not benefit from them because it would be difficult to build up an adequate stash, but those who are relatively healthy definitely can. The funds can go toward paying for medical expenses, or they can go toward paying for retirement. There is no better tax-advantaged account available.