Wall Street – Love It or Hate It, Business Owners Need It
February 11, 2021Health Savings Accounts: Why They Are Useful and How to Set Up
Did you know that even with the skyrocketing costs of medical care, there are ways you can reduce those out of pocket expenses? And if saving money sounds like something you want to do then you’ll definitely want to look into a Health Savings Account (HSA). These accounts are tax-exempt trusts that are set up to help with qualifying medical expenses…in other words, you can pay yourself back for those doctor’s visits. However, there are some guidelines you have to follow in order to obtain one.
The IRS’ Eligibility Requirements for Health Savings Accounts:
- You must be covered under a high deductible health plan (HDHP) [see table below], on the first day of the month.
- You have no other health coverage except what is permitted under Other health coverage, later.
- You are not enrolled in Medicare.
- You cannot be claimed as a dependent on someone else’s tax return.
| Self-only coverage | Family coverage | |
| Minimum annual deductible | $1,400 | $2,800 |
| Maximum annual deductible and other out-of-pocket expenses* | $7,000 | $14,000 |
| * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. | ||
If you meet these guidelines then it’s time to set up an HSA so that you can benefit from the tax advantages offered by having this type of an account. You’ll need to find an HSA custodian to open one with. Typically, what I recommend is setting one up at a bank that provides investments and interest-bearing accounts. I personally use Wells Fargo because it allows me to have investments and an interest-bearing cash account, however, there are many other providers. Speak to your wealth manager for guidance. You may opt to use a large bank such as Suntrust or perhaps a small local bank like Home Federal here in Knoxville is more your flavor. Whatever you choose will still give you the same tax exemptions offered by the IRS on an HSA.
Contributions to an HSA
Making contributions to an HSA is easy, however, there are limitations. All HSAs are cash only accounts, meaning you can’t contribute stocks or property or other types of investments to the account. Luckily, not only can individuals contribute to an account, but so can employers and family members choosing to do so on their behalf, but those amounts depend on several factors, such as the type of coverage you have, your age, and the date you became eligible or ineligible. The amounts for contributions this year, 2021, top out at $3,600 for individual plans and $7,200 for family plans unless you’re 55 years or older by the end of the tax year. At that point, the 
contributions are upped by $1000. You’ll be eligible to make contributions until they’re maxed out until April 18th of the following tax year. For example, if you have an individual plan and by next January you’ve only contributed $2,000, then you can still put in another $1,600 for 2021. Next Year, 2022, the limits increase to $3,650 for individuals and $7,300 for family coverage.
Distributions from an HSA
You can take money out of your account TAX-FREE as long as it’s for a qualifying medical expense. When getting reimbursed from an HSA, you’ll generally have to have reached your annual deductible. This is where an HSA becomes such a great asset though, especially if you’re young and healthy. If you’ve taken no reimbursements your money is growing tax-free and you’re getting a tax deduction on the money you’ve invested in the HSA. That money can set and grow over the years if you needing it and can eventually possibly be used in retirement to pay long-term health care expenses or supplemental costs or income in retirement. There’s no limit to how large the account can grow to, outside of the yearly limitations, so that makes it a great wealth building tool! There’s no other account like it…where you can put the money in for a tax deduction and get the money out TAX-FREE! Now if you choose to take the money out for some other reason you will be subject to income tax guidelines and an additional 20% tax on top of it.
So in theory, this account could help you pay yourself as opposed to paying the insurance company and take on some extra risk. All of a sudden a medical issue arises that costs you $5,000 and instead of dipping into your IRA early or wiping out an emergency fund you’ve been building, you have the money to cover the expense. And if you haven’t needed to touch the money over the long term, you’ll have built money up for use later on.
If this peaked your interest, speak with a qualified tax professional and financial advisor.
