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Think Twice Before Spending HSA Money

Posted by Marty Williams, CPA on Apr 20, 2016 2:07:47 PM

iStock_000071137319_Large-619177-edited.jpgAs employers have increasingly turned to high-deductible healthcare plans to offset sharp increases in employees’ healthcare plan costs, some employees have taken advantage of available Health Savings Accounts (HSA) as a way to manage these high deductions. Similar to an IRA, employees contribute a certain percentage of their pay through pre-tax deductions that accumulate tax-free until the money is spent on approved medical costs.

It’s understandable that people have medical needs for which it makes perfect sense to dip into their HSA funds. The gap before the deductible is met can be quite steep, and some medical needs that are not covered by your plan are approved for HSA spending.

However, there’s another way to look at this attractive tax-free account. HSAs can be a great way to build a nest egg for healthcare needs during your retirement. 

Accumulating Funds for Retirement
Let’s say that you and your employer – through matching funds that vary by company – contribute the maximum $3,100 for an individual or $6,250 for a covered family. Not only do the funds reduce your taxable income, they are tax-free when you take them out, either now or later in retirement, as long as you use them for healthcare expenses. If you are 55 of older, there is even better news—you can add in another $1,000 per year.

Similar to a 401(k) plan, you are able to invest the money and not incur taxes as your fund grows. What’s more, if you don’t use the money in retirement, it can be passed on to your beneficiaries for their own healthcare expenses. Keep in mind—you can use the money for non-medical issues, but you will incur a 20% penalty before age 65, or owe income taxes after age 65. Another way to think of it is that in many ways, the HSA acts just like an IRA. Think of it as a way to increase your annual IRA or qualified plan contribution. 

Maximizing Full HSA Value
At the end of each year, there tends to be a “use it or lose it” mentality that has people scrambling to spend the money in their accounts on a new pair of glasses or some other covered purpose. Keep in mind that your HSA fund stays with you—you will not lose it even if you change employment. If you are in a position to pay for something you need out of pocket, think about letting your HSA account grow indefinitely. It’s a great tax savings vehicle when you know how to use it to your best advantage. 

Looking for more information on the above article or individual tax planning, contact Marty Williams, CPA by calling (334) 887-7022 or by leaving us a message below.



Topics: Tax Planning

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