So many of us are sick and tired of hearing news reporters talk about the problems with today’s health care, and even worse is the political commentary on what should and shouldn’t be fixed.
In fact, with all of the confusing sound bites, arguing and rhetoric in the media today, it’s hard to believe there are any real solutions that could positively impact our personal lives. However, I believe there are strategies that can work! Your personal plan does not have to be a mess…there are options!
The Health Savings Account is one of the most powerful pieces of a well designed health care strategy. It includes saving money, saving taxes, building a tax-free ‘bucket’ for health care and most importantly taking control of your own health care strategy.
- You save money because in order to have an HSA, you have to have a ‘high deductible health care plan’. Well, chances are you will have a lower premium with a higher deductible and save money.
- You save taxes because you get a tax deduction when contributing to your HSA, right on the front page of your tax return.
- You build a ‘tax free bucket’ of money in an HSA, just like an IRA. The money can be invested and the growth is tax free and withdrawals for health care are tax free.
- Finally, you take control of many health care decisions because you can pay cash out of your HSA. Imagine that! No insurance company between you and your health care provider where you can control your care and negotiate for lower prices. Even the doctor’s win!
Now let’s hit the nut’s and bolts.
1. The Tax Deduction. Your HSA contributions are deductible from your gross pay, or business income, on the front page of your tax return. This gives you a powerful tax deduction and can potentially even put you into a lower tax bracket. In 2016, the tax deduction is up to $3,350 for singles and $6,750 for families. In 2017, the tax deduction is $3,400 for singles and remains the same for head of household and married couples at $6,750.
2. The Deadlines. There are two important deadlines. First, you have to enroll in a high-deductible health insurance plan (HDHP) before December 1st in the year you want the deduction. So for example, if you want the write-off in 2017, make sure you have the right type of plan in place by December 1st, 2017. Second, you can make the contribution and take the deduction up until April 15th following the year you want the deduction. For example, you can open the account AND make the contribution before April 15, 2018 and get a write-off for 2017.
3. Tax free growth. The funds grow tax-free and aren’t a “use it or lose it” plan. The HSA account grows and builds for your future healthcare needs. Investments aren’t counted towards contributions either. Win big on investing with your HSA and still ‘pass Go’ every January and make another contribution.
4. Tax Free withdrawals. You can also spend the money tax-free on qualified medical expenses. This could be deductibles, dental, eye-care, chiropractic, acupuncture and even hotel and lodging while at the hospital. The list is quite exhaustive and comprehensive. Moreover, you can start taking out money immediately and there’s no waiting period. Just change the way you normally approach your health care spending. For example, stop at the bank and make a deposit in your HSA on the way to the doctor. Then pay the bill out of your HSA visa. You just generated a write-off the same day. Check out IRS Publication 502 for a list of the hundreds of medical expenses you can pull out of your HSA tax-free.
5. Self-direct your HSA Investments. You can even “self-direct” your investments inside your HSA. This means you aren’t simply stuck with a mutual fund option provided by your bank. You could invest in a restaurant, real estate or even super bowl tickets. If you want to self-direct, just place your HSA funds with a ‘custodian’ that allows for self-directing rather than with your local bank. Read this related article on the topic regarding the self-directing strategy: Who are Self-Directed IRA Investors?
6. An HSA can help pay for your retirement. After you turn 59 1/2, there is also the option to withdraw the money for non-health care expenses, and then pay federal income taxes on it. The HSA then acts much like a traditional IRA since the HSA holder pays ordinary income taxes on non-medical related withdrawals, with the added perk that you don’t have the mandatory disbursements usually required by traditional IRAs. This protects you from the concern I often hear “What happens if I don’t need the money for health care”? The simple answer is, don’t worry- you can use it like an IRA in the future.
7. How to set-up an HSA? Remember, the insurance is completely separate. Get the right type of insurance that qualifies you and then DON’T CALL your insurance company for an Health Savings Account…they don’t administer them- they just sell insurance. Once you have the insurance, the easiest is to open up an HSA at your local bank. You can sometimes even do it within minutes on line. No major paperwork. Just check the proper boxes, sign the form and make a deposit. Most Bank HSAs will then give you a Visa card to pay for medical expenses right out of your HSA. However, if you want to ‘let the money ride’ and invest the HSA and not pull out money for medical expenses immediately- for example “self direct” (see item 5 above), then you would open up your HSA with a self-directed IRA custodian. At our law or accounting office we can give you a list of choices. Then…we set up your LLC for your HSA here at KKOS lawyers and you are off and investing! That easy.
Bottom line, the HSA is one of the most under utilized tax strategies by Americans today. Even President Trump in his Inaugural Address mentioned the HSA by name and stated it need to be a larger part of any changes to the health care legislation. It’s a fantastic tax savings strategy as well as a powerful tool to help pay for current and future health care costs. Everyone should at least consider the HSA as an option when purchasing insurance and saving for taxes.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.