I meet with clients almost on a daily basis who are unaware of the benefits of a Health Savings Account (HSA). Yes, the Affordable Health Care Act (Obamacare) can be confusing, but it's important to know that the HSA is one of the most powerful pieces of a well-designed health care strategy.
The following are seven key benefits to opening your own HSA before it's too late:
Many people think that you have to be a business owner in order to implement an HSA, but that's not true. Anybody who obtains the right type of insurance (see below) can have an HSA. Moreover, your employer doesn't have to set up the HSA or contribute to it; they just need to offer an HSA-qualifying insurance policy, or you'll have to enroll in one on your own.
2. Tax deduction
Your HSA contributions are deductible from your gross pay, or business income, on the front page of your tax return. This gives you a powerful tax deduction and can potentially even put you into a lower tax bracket. In 2016, the tax deduction was up to $3,350 for singles and $6,750 for families. In 2017, the tax deduction is $3,400 for singles and remains the same for head of household and married couples at $6,750.
3. Tax-free growth
The funds grow tax-free and aren’t a "use it or lose it" plan. The HSA account grows and builds for your future healthcare needs. Investments aren’t counted towards contributions either. Win big on investing with your HSA and still "pass Go" every January and make another contribution.
4. Tax-free withdrawals
You can also spend the money tax-free on qualified medical expenses. This could be deductibles, dental, eye-care, chiropractic, acupuncture and even hotel and lodging while at the hospital. Moreover, you can start taking out money immediately and there’s no waiting period. Just change the way you normally approach your health care spending. For example, stop at the bank and make a deposit in your HSA on the way to the doctor. Then, pay the bill with your HSA card. You just generated a write-off the same day. Check out IRS Publication 502 for a list of the hundreds of medical expenses you can pull out of your HSA tax-free.
5. The self-direct option
You can even "self-direct" your investments inside your HSA. This means you aren't simply stuck with a mutual fund option provided by your bank. You could invest in a restaurant, real estate or even Super Bowl tickets. If you want to self-direct, just place your HSA funds with a "custodian" that allows for self-directing rather than with your local bank. Learn more about the self-directing strategy here.
After you turn 59 1/2, there is also the option to withdraw the money for non-health care expenses and then pay federal income taxes on it. The HSA then acts much like a traditional IRA since the HSA holder pays ordinary income taxes on non-medical related withdrawals, with the added perk of no mandatory disbursements usually required by traditional IRAs. This protects you from the concern I often hear, “What happens if I don’t need the money for health care”? The simple answer is, "Don’t worry. You can use it like an IRA in the future."
7. Easy set-up
Remember that insurance is completely separate, so DO NOT CALL your insurance company to set up your HSA. They don't administer them; they just sell insurance. Instead, you have two options to set up your HSA. The first option is to set it up at your local bank, whether you go in physically or complete the set-up online. There's no major paperwork; just check the proper boxes, sign the form and make a deposit. Most bank HSAs will then give you a Visa card to pay for medical expenses right out of your HSA. However, if you want to let the money ride and not pull anything out immediately, you could use the second option: an IRA custodian. At our law or accounting office, we can give you a list of choices, and then, we set up your LLC for your HSA.
Deadline for 2016 closing soon
Generally, there are two important deadlines for HSAs: one for enrollment in the proper plan and another for contribution and deduction. You will have to enroll in a high-deductible health insurance plan (HDHP) before Dec. 1 in the year you want the deduction. Then, you can make contributions and take the deduction up until April 15 following the year you want the deduction. So for example, if you want the 2017 write-off, you'll need to enroll in the right plan by Dec. 1, 2017 then make contribution and take your deduction by April 15, 2018. If you want your 2016 deduction and you were already enrolled in a HDHP, you have days left to capitalize on this investment! Just open your HSA, make a contribution, and take your deduction by April 15, 2017.
By harnessing the power of the HSA, you'll be able to save money with a low-premium, high-deductible health care plan, save taxes with a coordinating deduction, build a tax-free bucket of money designated for medical expenses, and most importantly, get rid of the insurance provider middleman and take control of your own health care strategy. Bottom line -- the HSA is one of the most under-utilized tax strategies by Americans today. Even President Trump in his inaugural address mentioned the HSA by name and stated it needed to be a larger part of any changes to the health care legislation. So open your own HSA and reap the benefits before it's too late!