Like it or not, the cost of healthcare is constantly rising, and with a greater portion being shifted to you,
the consumer, you may find yourself wondering if there is a better way to plan and pay for your medical expenses. If you purchase a High-deductible Health Plan from your insurance provider, you may be in luck!
What qualifies as a HDHP?
- Tax deductible
- Tax-free money
- Funds Roll-over
- Prepares for the future
The IRS states that a high deductible health plan is a policy that has a higher annual deductible than other insurance plans, as well as having a maximum limit on the annual deductible, and out of pocket medical expenses that you have to pay before the insurance kicks in. This is summarized in the following table:
If your Health insurance plan meets these criteria, you qualify for an HSA.
What are Health Savings Accounts?
A Health Savings Account (HSA) is comparable to an IRA, except it isn’t exclusively a retirement account, with the money being reserved for medical expenses. Money in the account can help you pay up to the deductible, and once it is met, the insurance begins paying.
By opening an HSA you are able to put away funds that aren’t subject to federal withholding at the time of deposit. The funds can be used to pay for qualified medical expenses, at any time, for medical expenses that are below your health plan’s deductible amount. Beyond that, the funds can be used for any co-pays once your deductible is met.
Like an IRA, an HSA does have contribution limits. For 2015, if you have self-only coverage, you can contribute $3,350 per year, while those with family coverage may contribute up to $6,650. There is also a catch-up contribution for those 55 or older, which is an additional $1,000, for both self-only and family coverage plans.
Please keep in mind, if you withdraw funds for anything other than qualified medical expenses, the funds will be taxed at your income tax-bracket, plus an additional 20% if you are under 65 at the time of withdrawal. Ouch!
Benefits of Health Savings Accounts
Contributions to your HSA are completely tax deductible, up to the contribution limit set by the IRS. This lowers your Adjusted Gross Income, lowering your taxable income, and can even lower your tax bracket.
Withdrawals taken to pay for medical expenses are tax free, which even includes dental and vision expenses.
Depending on the HSA you open with your healthcare provider, the contributions made to your HSA can be used to invest, or accumulate interest. The earnings of which are tax deferred, or tax-free if used on qualified medical expenses.
Unlike other health care savings plans that put your funds in a “use-it-or-lose-it” situation at the end of the calendar year (FSA, flex spending plans), the contributions made to your HSA roll-over year after year. So the money really is yours, to continue to investing and collect interest.
When you retire, the funds don’t go away, and any funds withdrawn after the age of 65 are not penalized, though income taxes do apply if the money is not used for qualified medical expenses.
If you are still unsure about whether you qualify for an HSA, we recommend talking with your insurance provider to find out the exact details of your situation. If you want to know how to move forward and benefit from a Health Savings Account, be sure to sign up for a free tax consultation below.
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