Understanding the Tax Benefits of the HSA
The health insurance savings account (HSA) is an underutilized attribute of the Affordable Care Act, and you can take advantage of its tax benefits once you understand how it works. At its core, the HSA enables you to take care of health costs in the present as well as in the future; the federal government aids in this endeavor by conferring a tax-exemption on the interest earned. This is just one of the many reasons to use a health savings account, in fact:
- As the owner of a health savings account, youâ€™re allowed to extract money from it for certain medical expenses outlined in the appropriate IRS manual
- Any contributions to the account are tax-deductible
- As mentioned, the interest is tax free; additionally, if financial contributions are provided to the HSA via payroll deduction, these contributions are assessed as pre-tax
Thereâ€™s a wide range of applicable health expenses – many of them include things such as hotel lodgings near the hospital if youâ€™re there for a procedure, and Eastern medicine such as acupuncture. Even mental health and treatment for substance abuse are considered. In all likelihood, most services your healthcare provider performs are covered.
What Are Some of the Restrictions On an HSA
Healthcare Savings Accounts actually have fewer restrictions than other insurance types. For example, if it just so happens that you donâ€™t require health care in later years, then you can simply use your accrued HSA as an IRA – kind of like a Gold IRA that you might have secured at your place of employment.
Another attribute of the HSA is that the money is yours interminably; meaning it is not afflicted with the carry-over fees that plague other securities. Thereâ€™s no limit, nor is there a mandate as to when the funds must be used. All contributions made to it are tax-deductible, too, which leads savvy investors to deposit some of their investment capital inside each year.
Of course, you still want to make wise decisions – as tempting as it may be to use the HSA as an investment vehicle because of the tax-exemptions; keep in mind that the need for health care is directly proportional to age. What do you think the chances are that you wonâ€™t need healthcare as the years pile up? Sure, your health savings account is a tax-shelter, but keep your health in mind as you make decision with the account.
Advisable Strategies for People with a HSA
Although you have the option of using the money in your HSA as you deposit it, a more advisable (generally) strategy is allowing it to grow without touching it, so as to let as much money as possible accrue without being taxed. The fact is, health care costs have been rising as much as 6.5 percent in the past year or so – which doesnâ€™t bode well for those who arenâ€™t saving for retirement.
There are some limitations involved with the HSA: the amount of any contribution is restricted – this can vary from year-to-year. Also, if you extract money from your account for non-medical expense purposes, then you can take a huge 20% financial hit as a result. This only applies to people younger than 65; once youâ€™re older than that, whatever you extract is free from financial penalty. You still have to pay taxes on it, though – unless the uses are demonstrable related to medical expenses as listed in the IRS manual.
Ultimately, a health savings account is an essential tool for just about everyone. You can get it through your employer or, if youâ€™re a business owner, on your own.
James is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.