STEPHEN SMALENBERGER, EA ®
Sometimes our clients ask us, “How do we take advantage of different tax benefits?” Or, “My employer is offering this, should I take it?” One account that’s really helpful is an HSA: Health Savings Account.
Let’s talk through it, explain what it is, some of the rules, and why you would want to do it.
What is an HSA?
So an HSA is essentially just another account. Think of like your IRA or 401K, very similar. HSA stands for health savings account. It’s available to those that have a high deductible health plan. So if you have a high deductible health plan, you could set up an HSA.
“How does it work? How do you put money in? How do you take it out?”
Similar to your IRA, there’s limits on how much you can put in. But in this case there’s no limits on how much you make. So an individual can put in $3,450 per year. A family or those filing jointly and put in $6,900 a year. And these are 2018 limits. If you’re over age 55, it’s a little bit different from a 401K or IRA. It’s not 50, it’s 55, and you can put an additional $1,000.
So all that money is going into the account, it’s being deposited right there. It can also be invested and grow just like any other account. And then eventually you’re gonna take the money out, and there’s some rules there.
So this account is really special, it has three parts. It’s kind like a triple play effect. The money that’s going in, is tax deductible or pre-tax. The money that’s growing, is growing like a Roth IRA. Not an IRA. It’s never taxed, it’s tax free. And eventually when you’re taking distributions, or money out, if you’re using it for medical expenses, health savings expenses, it’s tax free as well.
So money going in is tax free, tax deductible, pre-tax money in the account is growing tax free. And money coming out, if you use for medical expenses, is tax free.
When can you put money in?
So you have until the end of the year, and then until April 15th to put it in for the prior year. Some great advantages and some rules now about this unlike an IRA, there’s no RMDS. So you never have to take money out. It can actually accumulate and grow year-to-year-to-year. If you’re over age 65 and your signed up for Medicare, you can’t put it in contributions any longer. But you can always take the distributions out.
Another nice rule here is you can set up beneficiaries. So maybe you want to pass this along if something happened to you. You pass this along to your spouse. She inherits this or he inherits this. Just like it is an HSA account, they use it for their medical expenses. Their respective expenses. If it was a non-spouse, a child or a family member, that essentially received this account, they receive it all as a taxable distribution. It just becomes like their individual or joint account.
One other consideration is what if you need to use this money. What if you put money in and realize I need it for some other reason? If you take the money out, and you use it for non-medical purposes, you pay income tax. And there’s a 20 percent penalty if you’re under age 65. Once you’re over age 65, there’s no 20 percent penalty. But as long as it’s used for medical purposes, this is a great account. It actually encourages those to save for future health expenses.
If you have any other questions about this, or if we can be helpful in just explaining some of this in more detail, please let us know. We’re always happy to help you.
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