Health insurance options are confusing at best, and often employees are overwhelmed with what to select when starting a job or during open enrollment. While a high-deductible health plan, or HDHP, might sound a bit scary, it just means you pay a lower premium per month, but a higher annual deductible for medical care. How high ? In 2022, the deductible is at least $2,800 for a family and $1,400 if you are single.
One of the benefits of a high deductible health plan is that it provides the opportunity to save money in an HSA. An HSA, or Health Savings Account, is a triple tax benefit account where you can contribute money before tax, allow it to grow tax-free, and then withdraw it tax-free. as long as you use for a qualified medical expense.
Don’t confuse HSA with FSA
Although HSA and FSA may seem similar, they are very different accounts with different rules. The FSA, or Flexible Spending Account, can be used for any type of health insurance plan, while an HSA is only used with a high-deductible plan. Although HSA and FSA accounts may be offered by your employer, the HSA can support you if you change employers or retire.
Flexible Spending Accounts have limits each year on how much you can carry forward to the next year and as such are meant to be used for medical expenses during the year. For your health savings account, you can choose not to withdraw any amount that year and all the money will be paid into the following year and beyond.
Save these receipts
Although you can carry the money over from one year to the next in your HSA, you will need to keep track of each medical expense to later withdraw the money as an eligible expense.
Keep those receipts! The IRS determines what is considered a qualified medical expense, and if your withdrawal amount does not qualify, you will be hit with a tax penalty. Keep track of your medical bills, expense receipts, and other documents so you can withdraw the exact amount you spent to avoid the penalty and withdraw the money tax-free. Another thing to keep in mind is that those same expenses you want to take out of your HSA cannot be taken as an itemized deduction on your taxes that year.
How high are the tax penalties? There is a 20% tax on any withdrawal amount that is not used for eligible medical expenses. There’s good news – the IRS has an exception for no additional tax on distributions from an HSA after you become disabled, turn 65, or die.
Using your HSA as an investment strategy
One of the main benefits of the Health Savings Account is that you put money in before tax, allow it to grow a tax tree, and then withdraw it tax-free as long as you have fees. medical eligible. These tax savings, combined with the investment potential of the account, can accumulate over the years. One investment strategy for your HSA is to maximize the amount you can contribute each year. In 2022, the current limits are $3,650 for self-coverage and $7,300 if you have family coverage.
If your employer matches the contributions, take advantage of it. You have to take the employer match into account, in that it reduces the amount you can contribute. Take the amount your employer contributes to your HSA and subtract it from your maximum contribution amount to determine how much you can contribute each year.
Keep in mind that HSAs aren’t subject to the required minimum distributions like an IRA or 401(k), so there’s no set amount you need to withdraw each year once you turn 72.
It’s always best to discuss your investment strategies with a financial advisor who can review your overall financial situation and help you determine the best course of action for your specific needs.
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President, Partner and Financial Advisor, Diversified, LLC
In March 2010, Andrew Rosen joined Diversified, bringing with him nine years of financial industry experience. As a financial planner, Andrew forges lasting relationships with clients, supporting them through all stages of life. He obtained his Series 6, 7 and 63, as well as P&C and Health/Life insurance licenses.