The HSA – a Tax Tool in the Era of Obamacare

Not all
tax-sheltered investments are equal.
Take, for example, the HSA, Health Savings Account.  It could be a considered an investment choice
in an age where healthcare is shifting radically enough that now everybody is
paying attention.  One way employers are
dealing with this shift, is by making their employees proactive partners in the
arena.  The thinking is that with higher
deductible / lower premium healthcare plans becoming popular, the employer can
shift the money they were spending on premiums, to payments into an employee’s
HSA account; and that the employee—having this money grow tax-free there—will
be thereby incentivized to stay healthy.
Because in this case, you can take it with you.

It’s true, in many
cases it makes perfect sense with HSAs to leave the money right there until
you’re 65 – at which time you can withdraw it, still tax-free for medical
costs, but now having been in the tax haven for maximum amount of time to grow.  And that one of the things that is so great
about this particular vehicle is that there’s no penalty–or tax–on
contributions and earnings for using the funds for qualified medical
expenses.  Unlike a 401(k) for example,
distributions from HSAs for medical costs are tax-free.    

Because HSAs aren’t
terribly sexy and have not typically been a big investment, they’re often
overlooked.  So many people don’t have a
concept of strategy for this fund, or pay attention to it as they would other
parts of their portfolio.  But not all
HSAs are created equally:  some just grow
interest, others are investment vehicles.
Self-employed taxpayers can choose banks which provide HSAs with
investment options.  And employees of
companies should likewise be encouraged to speak with their HR personnel about
adding options with investment capabilities, if they don’t already exist.  Most firms would welcome the added level of
participation.

Spouses too, can
make contributions to an HSA, so you’re increasing the maximum deposits allowed
– a family caps at $6,750.  There are
other ways to add to that – such as a catch-up provision for taxpayers over 55,
who can invest an additional $1,000 each year until age 65.  And you can gift into people’s HSAs – it’s a
nice thought for a family member, and a way to give now.

Even the wealthy can
benefit from its use.  Because medical
expenses are subject to an income limitation, earners of higher income normally
get no tax benefit for these costs, which default to Schedule A as an itemized
deduction.  An HSA, on the other hand,
goes on the front of a Form 1040, thereby reducing taxable income – which can
be something of a boon even for those who earn beyond the limit for Schedule A.

Once you turn 65 you
can also just take out the money as in a 401(k), for any purpose, and pay the
deferred taxes.  And at this or any time
before, you have the option to be reimbursed with tax-free distributions for
prior and current medical cost – so you can just keep good records, see how it
goes.

In short, this
option should not be overlooked – certainly in conjunction with other
retirement accounts.  It’s a strategy that
carries the added force of positive thinking.
It is research on this synergy that led employers to come to these ideas
to begin with.  Preventative healthcare
begins with you, and the HSA is a way to bet on your own wellness.  

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