It is no secret that health insurance is expensive. As a result, many Americans simply go without health insurance. Between Medicaid, company sponsored plans, Obamacare, and Medicare, it can be difficult to navigate the sea of options and insure one’s health in an affordable manner. There also aren’t very many ways in which the average person can save money on insurance premiums. For the right person in the right circumstances, however, there is one tool known as a Health Savings Account (HSA) that can help make health insurance premiums more affordable and provide other tax and cost-saving benefits.
What Is a Health Savings Account (HSA)?
Created in 2003, Health Savings Accounts (HSAs) are tax-advantaged savings accounts that allow individuals with high deductible health insurance plans to save money for qualified medical expenses. Contributions are tax-deductible, grow tax-deferred, and can be withdrawn tax-free.
How Do HSAs Work and What Are the Benefits?
When choosing health insurance, one must decide how high of a deductible to choose. In the event of a claim, the deductible is the amount one must pay out of pocket before the health insurance provider picks up the bill. Lower deductibles make insurance more expensive; higher deductibles make it less expensive. Even though high-deductible plans are more affordable, the obvious risk of such plans is that one will not have the money available to pay out-of-pocket medical expenses up the amount of the higher deductible. This is where the HSA comes into play. The beauty of HSAs is that they allow one to choose the high-deductible plan, thereby saving money on monthly premiums, yet protect against the risk of not having funds available to cover medical expenses up to the amount of the higher deductible.
The way the plans work is that an individual sets up an HSA with a qualified HSA provider, which is usually done through a bank, financial advisor, or other financial institution, and the government allows individuals with self-only insurance coverage to contribute up to $3,350 (2015 and 2016) and $6,650 (2015; $6,750 for 2016) for individuals with family plans. Savers 55 and older can contribute an additional $1,000. These contributions are fully tax-deductible, grow tax-deferred, and can be withdrawn tax-fee when withdrawn for qualified medical expenses. If funds are withdrawn prior to age 65 and used for anything other than medical expenses, the IRS imposes a 20% penalty tax on the withdrawal. After age 65, however, the funds can be withdrawn for any purpose, and are subject to ordinary income tax. The funds are also portable, which means they can be moved to another provider. Moreover, savings can be rolled over each year if not used; there’s no “use it or lose it” requirement. Tax payers have until April 15th to make a contribution for the previous tax year.
Another nice feature, depending on the HSA provider, is that the funds can be invested in a variety of investments. Funds that aren’t used to cover medical expenses can then be used as an additional source of savings for retirement or other financial goal. Investment options may be limited depending on the HSA provider, but HSAs opened with Dunston Financial Group have a vast array of investment options and can be professionally managed by a Registered Investment Advisor.
How to Qualify for an HSA
In order to be eligible for an HSA, one must 1) be covered by a high deductible health plan; 2) not be covered by another health plan; 3) not be eligible to be claimed as a dependent on another person’s tax return; and 4) not be entitled to Medicare benefits.
For 2015, a high deductible health plan is a plan with a deductible of $1,300 for individual coverage and $2,500 for family plans. The plan must also have a maximum annual deductible and other out-of-pocket expenses of $6,450 for individuals and $12,900 for family plans.
Unlike IRAs, there are no income limitations on HSAs; anyone who meets the criteria (above), can start saving and investing in an HSA.
By establishing a high deductible health insurance plan, you can save money on insurance premiums. Coupled with a Health Savings Account, you can further save money on income taxes by making annual, deductible contributions to your HSA. These funds can then be invested in a tax-deferred manner, and can be taken out tax-free for medical expenses prior to age 65, or for any purpose after age 65. For savers who have funds invested in other accounts and who have a high deducible health plan, shifting funds into an HSA can keep funds invested while creating a tax deduction. The IRS even allows a one-time rollover from other retirement plans.
Setting up an HSA is easy. To learn more about eligibility, or to set up an account and make a contribution for the 2015 tax year, contact Lynn Dunston at Dunston Financial Group.