Within the ever-changing, never-improving world of health insurance, there is hidden a little gem called a Health Savings Account or HSA.  There are several requirements to be able to utilize an HSA that we will touch on in a bit, but the first is that you must be enrolled in a high deductible health insurance plan.  Every person’s situation is different, but if you have limited options and a high deductible plan is one of them, this information is for you. 

In order to have an HSA, you must be covered by a high deductible health insurance plan.  You must also not be covered by another health insurance and not be enrolled in Medicare.  Finally, you must not be another person’s dependent. 

One of the new additions to the IRS code is the increased amounts for the standard deductions. This helps a lot of people, but it also reduces the number of people who will itemize.  The new standard deduction($24,000 for a married filing joint couple) eliminates most people’s ability to write off their medical expenses.  By funding your HSA, you are using pretax money to pay your medical expenses,therefore you are technically still getting to write off those expenses.  The limits for contributions for 2018 will be$3,500 for a single plan and $7,000 for a family plan.  If you are age 55 or over, you can add $1,000 to either of those amounts as a catch-up contribution.  These contributions are made with pretax money, meaning that you save taxes for every dollar you put in an HSA.  In 2018, a married filing joint couple with a taxable income of $90,000 living in Iowa, contributing $7,000 to an HSA would save them $2,169 in tax!  The money inside the HSA can be invested and grow tax-free as well.  The funds inside are then available to reimburse you for any qualified medical expenses you incur.  When the funds come out of the account,growth and all, there is ZERO tax on any of it if it is for qualified medical expenses!  Anything pulled out the account that is not a qualified medical expense is subject to a 20% penalty and federal and state income tax.  To find out if a medical expense is a qualified expense click here

Another interesting concept is an employer offered HSA deduction.  If you put money into your HSA through your wage, you not only get that as a deduction from your federal and state income tax, but you also get that prior to FICA taxes.  This saves you another 7.65% on the contribution.  So, using the same example as above, if you have funded the $7000 through your wage, you really save $2,704.10 in taxes!

One of the most unknown advantages to the HSA is the ability to utilize it as another retirement type account.  There are no income limitations for contributing.  So as long as you meet the qualifications above, you can defer income. You can also set up an account online that will allow you to invest your HSA in many different investment options, giving you the chance to earn additional money on your contributions. There is also no time limit to when you need to reimburse yourself for qualified medical expenses.  This allows you the opportunity to not only defer income but potentially receive a majority of that income in the future completely tax-free.  Here is a quick example of this.  Let’s make the following assumptions:  you are 40, you begin putting $7,000 a year away in an HSA, that money earns 5%, and you have $3,000 a year in qualified medical expenses.  If instead of reimbursing yourself for those expenses on an annual basis, you paid them out of pocket and save documentation of them you can reimburse yourself for them at retirement.  If retirement is at age 65,that means your HSA funds would be valued at around $270,000 and you could withdraw $75,000 completely tax-free and the remaining at ordinary income rates.  The HSA currently has no required minimum distributions either.  There is no one telling you that you have to withdraw funds and pay taxes, unlike a traditional IRA.    

Obviously, as mentioned at the start, this type of plan is not ideal for everyone, but I believe it’s an interesting concept that is not discussed often enough or in enough detail. If you have any questions, please don’t hesitate to ask.  I feel this information is so valuable that I managed to type this whole thing without throwing my laptop through a window,even though every time I type HSA my computer auto corrected it to HAS.  Edit… I have been informed by my proofreaders that I could click ‘learn’ on HSA and it would have saved me that hour spent changing them all.  This is a new laptop,the old one didn’t make it…