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Plan Well, Retire Well

Saving and investing your money
savings in jar

Health Savings Accounts: What's Not to Love?


If you like avoiding taxes, you'll want to learn about Health Saving Accounts.

Odds are, someone in your family has a high deductible health plan (HDHP). That makes them eligible to have a health savings account, commonly called an HSA. High deductible health plans have become more common as employers look for ways to reduce the cost of health insurance. And many of the bronze level plans on the insurance exchanges created by the Affordable Care Act are HDHPs.

Tax-Free

The tax benefits of HSAs are unbeatable. Contributions to HSAs are not taxed, growth in the account is not taxed, and distributions aren't taxed as long as they're used to pay for qualified medical expenses. It's like having a tax deductible, traditional IRA with the tax-free distributions of a Roth, all rolled into one. But it gets even better!

You'll also avoid FICA and Medicare taxes if your contributions are deducted from your paycheck, a benefit you don't get with an employer retirement plan or IRA. (Exception: if your income is over the Social Security earnings limit –$117,000 for 2014 – by at least the amount of your HSA contribution, you will see no reduction in your total FICA tax.)

If your HSA is not through your employer, you take an above-the-line deduction for your contributions; you get the deduction even if you don't itemize.

Unlike many other tax breaks, these tax breaks are available regardless of your income.

A Great Gift

You can contribute to someone else's HSA. The recipient deducts the contribution and enjoys tax-free growth and distributions from your gift. It's a great way to help out adult children who have a high deductible health plan either through their employer or that they purchased through the online exchanges.

Facts and Figures

Anyone with a high deductible health plan (HDHP) can have an HSA. Check your policy's deductible and limit on out-of-pocket expenses to see if it qualifies. An HDHP must also provide preventive care with a lower (or no) deductible.

2014

High Deductible Health Plan (HDHP)

Annual deductible is at least

Annual out-of-pocket is no more than

Individual policy

$1250

$6350

Family policy

$2500

$12,700

HSAs were designed as a way for people with high deductible policies to put aside money to cover those expenses. How much you can contribute depends on whether you have an individual or family policy, and your age.

2014

Health Savings Account

Annual HSA Contribution limit

Additional contribution if age 55 or older

Individual policy

$3300

$1000

Family policy

$6550

$1000*

* Additional $1000 must be deposited into 55+ year old's own HSA. For a married couple both 55 or older, each must have their own HSA in order to each contribute an additional $1000.

In my next post, I'll point out some of the decisions you'll need to make about your Health Savings Account.



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COMMENTS



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I have used the MCAP for years; how does that differ from the above mentioned HSA? Also, if retired, are these type of tax-free accounts available to retirees?
by Katie Dorsey on Monday 2/24/2014

Katie, that's a great question. Money in both types of accounts is used to cover similar types of medical expenses, such as deductibles, copays, eyeglasses, and prescriptions. And they have similar tax benefits. Here are some of the differences: MCAPs (also know as flexible spending accounts) can only be set up through an employer who offers it. You can use an MCAP with any type of health insurance, not just the high-deductible health plan required for an HSA. But you must use all the money in your MCAP during the plan year, or by the end of a grace period that gives you an extra two and a half months. You forfeit any unused money in the MCAP, so making a good estimate during your open enrollment period is critical.You can no longer contribute to an HSA once you're receiving Medicare. However, you keep the account and any money in it; use it to cover out-of-pocket medical expenses even after you retire. For an MCAP, you must be employed and have an employer who offers it. So retirees are out of luck there. These are just some of the reasons that income taxes can actually go up when we retire!
by Karen Chan on Monday 2/24/2014

Hi Kathy, if I would to start a small, one person Business, would I still be entitled to these HSA benes?
by Debra Merritt on Monday 2/24/2014

Hi, Debra. Yes - if you have a high deductible health plan! Choose a financial institution where you want to set up your HSA. If you already have accounts with a large mutual fund company, you might check to see if they offer HSAs. Or do an online search; some banks specialize in these accounts. Use IRS Pub. 969 to figure out how much you can contribute. When you file your income taxes, you'll take an above-the-line deduction for your contributions.
by Karen Chan on Monday 2/24/2014