For some high income earners, a Health Savings Account (or HSA) can be extremely valuable.
First of all, you must qualify to make HSA contributions meaning you must have a high-deductible health insurance plan that meets certain guidelines. Assuming you do qualify, here’s how the HSA works.
A number of financial institutions offer HSAs so you can open an account at any one of these places. Contributions to an HSA are tax deductible (meaning you deposit pretax dollars into the account). This tax deduction is referred to as an “above the line” deduction. Now that can be very valuable! This means it is not phased out for high income earners like many other tax deductions. Also, this deduction generally applies to one’s state tax return too.
Many HSAs also offer investment choices instead of simply leaving the balance in low yielding cash. As these invested dollars grow, there is no income tax due.
Finally, all withdrawals used for qualifying healthcare costs are completely income tax-free!
There aren’t many opportunities like this…where you can get an upfront tax deduction, allow the dollars to grow without tax, and then withdraw them tax-free!
Of course, you are limited as to how much you can contribute. Your maximum HSA contribution will depend on whether you have single health insurance coverage or a family plan. For single coverage, the maximum contribution for 2015 is $3,350 whereas a family plan’s maximum contribution is $6,650. Also, individuals over age 55 can contribute an additional $1,000 annually.
Now, there are many other considerations. For example, someone with a lot of expensive medical costs may not want a high-deductible health plan. This video is simply meant to provide a brief overview of the possible tax advantages of an HSA.
Published: October 2, 2015
Authored by: Terry Prather, CFP®, ChFC®
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