Many of you have heard of Health Savings Accounts (HSAs) but may not have given them much thought. An HSA allows a health plan participant to save money in their account tax-free to pay for or reimburse themselves for qualified health care expenses. Your contributions are tax-deductible (or pre-tax if through your employer), they can be invested tax-free or earn money in a savings account and can be withdrawn tax-free for eligible medical expenses at any time. It’s a trifecta of savings!
Many of you probably participate in a flexible savings account (FSA) but you may want to consider an HSA for next year. HSA-eligible health insurance policies are high-deductible plans (with at least $1,400 for individual coverage or $2,800 for family in 2020). The HSA is different than a FSA in a few ways:
- An HSA account stays with the account holder whereas the FSA ends when your employment ends.
- The funds in an HSA account are yours forever unlike the FSA where the funds are only good for that year. It’s a use it or lose it situation.
There have been recent changes to the rules for HSA plans as well. As of January 1, 2020, you can now withdraw money from the plan tax-free for items like over the counter medicines, thermometers, feminine products and even sunscreen with an SPF of 15 or higher. In addition, participants can withdraw funds to pay for their health insurance premiums while they are collecting federal or state unemployment benefits or for their COBRA premium payments even if they aren’t receiving unemployment.
Because of the tax advantages, this type of plan can be a good tool to use as part of your retirement planning. If you fully fund it and invest the money, it can grow tax-free over time. By paying medical expenses out-of-pocket from the time the HSA is opened, you allow the funds in your HSA to continue to build and earn tax-free interest. Then you withdraw the money tax-free at retirement as a reimbursement. Just be sure to keep track of your medical receipts, explanations of benefit and invoices.
And one of the most interesting options is the ability for a parent to fund an adult child’s HSA annually up to the IRS contribution limit. So your child(ren) can receive a tax-free lump sum from you that can be invested and grow tax-free over time, effectively allowing you to put money away for them but not be subject to estate taxes.
Now is a good time to start looking at your options for next year!
Hope you have a great week!
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