HSA.
For some, those letters look like the word “has” that was missed on the auto spell check.
Actually, it stands for a health savings account and is a tax triple threat.
Meaning, you get a front page tax deduction when depositing money, that money then grows tax-deferred, and you can pull the money out tax-free (assuming you have qualified medical expenses).
How often do you have the option of avoiding tax completely?
If you are relatively healthy and have money set aside for emergencies, HSA plans can significantly reduce your healthcare costs by the tax savings.
Know Your Deductible
One caveat is that you have to be enrolled in a high-deductible health insurance plan (also called an HDHP).
This means a $1,300 deductible for an individual or a $2,600 family deductible. You also can not be eligible for Medicare or be a dependent on another person’s tax return.
There’s also a cap on the amount you can contribute in a year, similar to an IRA. For 2015, individuals can deposit $3,350 and a family covered by the plan can sock away $6,650. If you are over the age of 55, you get an extra $1,000 added to these amounts.
Any out of pocket medical, dental or prescription expense will likely qualify for an Health Savings Account but you want to check the IRS guidelines for “Qualified Medical Expenses” to be sure.
A Benefit Most People Don’t Use
For those that have the means to pay for medical expenses outside the Health Savings Account, there is an added benefit. In which most people don’t take advantage.
This is the ability to invest your savings in stocks and mutual funds.
Then in retirement, you can withdraw the savings tax-free to cover medical bills that occurred anytime the HSA was open. All you need to do is keep detailed receipts of your medical bills.
You’ll also want to investigate if there are fees for having a small balance. Many HSA plans require you to keep a certain balance in the bank portion of the account to avoid being charged a small monthly fee as well.
Here are a few resources to read further about these topics
- Using Health Savings Accounts to Invest for Retirement – NY Times
- The Error-Proof Portfolio: Don’t Get Nickel and Dimed by Your Health Savings Account – Morningstar
- An Overlooked Vehicle for Retirement – Morningstar
It is important you discuss with your financial planner if you fit the criteria above and have the option of opening a Healthcare Savings Account.
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