“…some’s got health and some’s got wealth.” —
An increasing number of Americans who participate in high deductible health insurance plans are utilizing Health Savings Accounts (HSA) in an attempt to reduce their federal income tax liabilities and protect themselves from future healthcare costs. According to the Government Accountability Office, over a half million Floridians participated in this type of plan in 2012.
Approved by Congress in 2003, HSA plans have recently become popular with taxpayers who have higher incomes that prevent them from being able to fund a deductible IRA account and enjoy a much-needed tax break. There are no income limitations for those who wish to fund an HSA.
You deduct your HSA contributions each year on Line 25 of tax Form 1040. The HSA contributions constitute a desirable “above the line” deduction that will lower your adjusted gross income dollar for dollar. The HSA account grows tax-deferred and many HSA companies feature investment options. Meanwhile, the participant is growing a “Medical IRA,” or money dedicated toward future health expenses.
HSA account owners must be a participant of a group plan or own an individual or family health insurance plan that is considered a high deductible plan. With individual (non-group) plans, the account owner establishes the account and contributes money to the HSA. Then, when qualified healthcare costs arise, the account owner pays the costs directly from the HSA account. No taxes are due on the distribution and there is no penalty for early withdrawal of the funds as long as the expenses are qualified medical expenses.
There are guidelines as to what constitutes a “medical” expense. While you cannot use HSA funds to pay your health insurance premiums, you can use them to pay qualified long term care insurance premiums. If withdrawals are made for qualified medical expenses, there are no penalties or taxes to pay. However, nonmedical withdrawals are subject to both income tax and a 20 percent penalty.
When HSA account holders reach age 65, the HSA account acts similar to an IRA account. If you use the funds for qualified medical expenses, there are no taxes to pay. In fact, you can even pay your Medicare insurance premiums with HSA funds. Withdrawals for nonmedical expenses are subject to regular income tax, which is no different than a traditional IRA.
Like an IRA, you can contribute to the previous year’s HSA anytime up until April 15th of the next calendar year. In a group plan, both the participant’s and the employer’s contributions count toward the allowable maximum. The maximum contribution for individual coverage in 2014 is $3,300 and $6,550 for family coverage. There is a $1,000 catch-up contribution allowed for individuals over age 55.
Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” and fiduciary registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.