The Anna Maria Island Sun Newspaper


Vol. 16 No. 15 - February 10, 2016

BUSINESS

Anna Maria Island Sun News Story

Health savings accounts – Part I

Investment Corner

In 2003, the government established Health Savings Accounts (HSAs) as a way for people covered under high-deductible health plans (HDHPs) to get special tax treatment towards saving money for medical expenses not paid for by their insurance. With an HSA, payers were able to receive a tax benefit for saving money to cover their deductible. As HDHPs gained popularity, the government wanted to incentivize saving to cover the higher deductibles, so that medical events would not be financially devastating for those with insurance in place.

Two Unique Benefits

An HSA has two unique benefits that make it especially appealing. First of all, you can contribute money to your HSA pre-tax. Because tax hasn’t been taken out, you end up with more to contribute. Many people have their HSA money withheld directly from their paycheck, so that they never even see it or have to pay taxes on it. Even if you fund your HSA with after-tax dollars and don’t have it automatically withheld, you can still receive the same tax benefit in the form of a deduction when you file your taxes. Either way – save now or save later – you still save on taxes by contributing to an HSA.

Not only do you save on taxes when you put money into an HSA, you save when you take it out as well. As long as it is for qualified medical expenses, distributions from an HSA are tax-free. This makes an HSA very unique among government savings plans such as 401Ks or Roth IRAs. Usually, you either contribute pre-tax but have to pay taxes on withdrawals, or you pay your taxes upfront before contributing and don’t get taxed on the withdrawals. Health Savings Accounts take the best of both kinds of plans to make a superiorly tax-advantaged savings vehicle.

However, withdrawals that are not for qualified medical expenses are not tax-free. If money is withdrawn for reasons other than qualified medical expenses, it is subject to normal income tax rates and a 20 percent penalty if the account holder is under the age of 65.

Who can participate?

You would think that with such great tax treatment, everyone would have an HSA. However, not just anyone is eligible to open one. If you want to open an HSA, you must be covered by an HDHP, not enrolled in Medicare or other health coverage and not claimed as a dependent on someone else’s tax return. As per IRS rules, to be considered an eligible HDHP, the plan must have a minimum deductible of $1,300 for singles or $2,600 for a family. The maximum out-of-pocket expenses are $6,550 for singles or $13,100 for a family. Though designed to help cover the costs of high deductibles, the IRS has capped contributions below the HDHP maximums at $3,350 for singles and $6,750 for families, with a $1,000 catch-up contribution available to those over 65.

HSAs are individual accounts, not joint accounts, so for married couples, only one spouse owns the account (the one through which the insurance has been acquired) while the other can be given rights to it as an authorized user. When the account owner dies, his/her spouse may take over the account and use it as this/her own without paying any taxes (for qualified expenses) or penalties.

As long as an individual is covered by an HDHP, anyone may make contributions to the HSA up to the IRS-imposed limits mentioned above, whether it is the individual, the employer, a family member or another third party. Once an individual ceases to be covered by an HDHP, he/she is still permitted to use the funds in the HSA for eligible expenses, but he/she or anyone else is no longer allowed to contribute to it.

When setting up a Health Savings Account and deciding the best way to use it, it is important to work with a knowledgeable financial professional. If you would like to know more about Health Savings Accounts or the prudence of using your current HSA for retirement savings, I can help you evaluate your options to maximize your future without sacrificing the present. Call my office at 941-778-1900 or by e-mail at tom@breitercapital.com, and we can discuss what is best for your unique situation.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.

 


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