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Health Savings Account Trifecta

| June 18, 2019
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Winning the trifecta in horse racing means picking the top three horses to win the race.  Winning the trifecta in personal finance could mean investing in a health savings account.  Health Savings Accounts (HSA) are savings accounts used for medical expenses.  A health savings account offers triple tax advantages – tax-deductible contributions, tax deferred earnings and tax-free qualified distributions.

 

The following are some of the key attributes in establishing and maintaining a health savings account:

  • In order to qualify for a HSA, you must first be a participant in a high deductible health insurance plan.  For 2019, this type of insurance plan has a minimum deductible amount of $1,350 (single) or $2,700 (family) and a maximum out of pocket amount of $6,750 (single) and $13,500 (family).

 

  • The 2019 maximum pre-tax or tax-deductible contribution amount is $3,500 (single) or $7,000 (family).  Catch up contributions of $1,000/year can be made if age 55 or older.  The annual contribution limit includes contributions made by both the employee and employer (if applicable).

 

  • Tax-free distributions can be made for a qualifying medical expense incurred after you establish the HSA. The expense can be for you, your spouse or your dependent children claimed on your tax return.  Qualified expenses include:
    • IRS qualified medical, dental and vision expenses
    • Prescription expenses
    • Long term care premiums (amount that qualifies as deductible based on age)
    • Medicare Part B & D (but not supplemental Medigap insurance)

 

  • A non-qualified withdrawal will be subject to income tax and an additional 20% tax (no additional tax on non-qualified withdrawals once you reach age 65).

 

  • Upon the death of the HSA owner, if a spouse is named beneficiary, then the surviving spouse will become the new owner of the HSA account.  If a spouse is not the designated beneficiary, then the HSA is no longer a HSA account and the value is taxable to the beneficiary in the year of death.

Funds in a HSA are able to accumulate and do not have to be spent every year (no “use it or lose it” rule). Even after you are no longer covered by a high deductible health care plan, you can still maintain your existing account and use the balance to pay for qualified medical expenses.  Many providers will allow for the funds to be invested in a selection of mutual funds or other investment products.  Therefore, if possible, it may be advantageous to pay for medical expenses out of pocket in order to allow the HSA account to continue to grow tax deferred.

These are some of the key attributes of health savings accounts.  Please let us know if you have any questions as to how you may be able to benefit from the triple tax savings offered in a health savings account.

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