Save Taxes and Money, Too

Americans are always looking for new ways to save taxes.  Now there is another way to save taxes when you save money—Health Savings Accounts (HSAs).  With an HSA, you can save for medical emergencies on a tax-free basis.

Q.:  How can I qualify for an HSA?

A.: In order to qualify, you must be covered under a “high-deductible health plan” or “HDHP.”  An HDHP is a health insurance plan that has an annual deductible of at least $1,000 for an individual or $2,050 for a family.  Of course, you do not qualify if, in addition to the HDHP, you are covered under another health plan (such as Medicare).  Finally, you do not qualify if you are claimed as a dependent on anyone else’s income tax return.

Q.:  How can I open an HSA?

A.: You can open an HSA with a bank or other institution, much as you would open an IRA.  The contribution to the HSA is limited to the annual deductible under the HDHP, up to a maximum of $2,620 for an individual or $5,250 for a family.

Q.:  Is an HSA tax-deductible?

A.: Yes.  With a traditional IRA, you get a deduction up front and you get taxed on withdrawal.  With a ROTH IRA, you get no deduction up front, but you also do not get taxed on withdrawal.  With the HSA, you get the best of both worlds.  Contributions to an HSA are tax-deductible, just like a traditional IRA, even if you do not itemize your deductions.  The funds in the plan grow without being taxed.  Like a Roth IRA, “qualified distributions” from the HSA also are not taxable.

Q.:  What is an HSA  “qualified distribution”?

A.: Qualified distributions are medical expenses that are not covered by insurance or any other program, and that you, your spouse or your dependents pay for out of your own pocket.  Qualified distributions include:  medical insurance deductibles, over-the-counter medications, plan co-payments, etc.  Premiums for health insurance are not considered qualified distributions.  However, long-term care insurance, COBRA continuation coverage, and health coverage while receiving unemployment compensation all qualify.  

For example, if you are in a 30 percent tax bracket, a $1,000 contribution would really cost you $700 after taxes.  If you invested that $1,000 at 7 percent for ten years, you would have $2,000.  If you use this to pay for medical expenses, you would have completely avoided income tax on the money you invested in the HSA account.

Q.:  Can I make distributions for purposes other than medical expenses?

A.: If you are fortunate enough not to have medical expenses down the road, you can make distributions for other purposes, but you would be taxed on the money withdrawn, and face a 10 percent penalty as well.

Q.:  What if there’s still money in my account when I die?  Can my wife use it?

A.: If you die with money in the account, your spouse can continue to hold the account and use it as you would have.  If the account goes to someone other than your spouse, that beneficiary would have to withdraw the funds and pay income tax on the withdrawal (but no penalty tax).

While not everyone qualifies for an HSA, if you qualify it is a great vehicle to save for future medical expenses.  With medical expenses rising quickly, this is a great way to save for the future.  From a tax perspective, with an HSA you get the best of IRAs and ROTH IRAs.  The HSA is one of the few legitimate ways you can avoid ever paying tax on some of the money you earn.

A qualified estate planning attorney can help you determine if an HSA fits into your overall goals.

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information contained herein is general and should not be applied to specific legal problems without first consulting with one of our attorneys.


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