Imagine if there was a type of investment account that you could save money into before taxes, it grew without taxes, and you could take the money out without taxes.
Does such a thing really exist?
Yes! It's called and H.S.A. otherwise known as a Health Savings account.
There are a few stipulations when using it, so I wanted to talk about the pro's and pro's of the H.S.A. I did that on purpose; in my eyes there are no con's when it comes to using an H.S.A. for your financial plans.
- There is a catch when it comes to H.S.A's. It's not a con, but a rule… The only people eligible to contribute to an H.S.A. have to be enrolled in a High Deductible Health Plan (HDHP).
This means that your health care plan needs to have an option to do a low premium and high deductible or out of pocket expense plan. The gov't incentivizes people to pay for things "out of pocket" by reducing the taxability of the account.
The 2019 minimum annual deductible is $1,350 for self-only HDHP coverage and $2,700 for family HDHP coverage. That means that if your plan doesn't have you paying for at least $1,350 of deductible, it doesn't count as a HDHP.
2. There are no taxes as long as you use it for qualified health expenses.
It's pretty much anything medically related.
Even if you get things that are medically related from Amazon you just need to keep the receipts. However, if you go shopping on Amazon and buy an amazing new drum kit to rock with your band, you will owe taxes.
The account grows without taxes too! Some H.S.A. providers will allow you to invest the money into mutual funds. If they receive any dividends or growth, it is tax free.
The 2019 annual H.S.A. contribution limit is $3,500 for individuals with self-only HDHP coverage (a $50 increase from 2018) and $7,000 for individuals with family HDHP coverage (a $100 increase from the restored 2018 limit.
3. It is an effective savings tool to use in retirement!
Think about it, typically the number one expense in retirement is…
If you were to save in an H.S.A for 20 or 30 years, then you'd have a big chunk of change that would essentially be discounted 20-30% because there wouldn't be any taxes!
Many high net-worth families are thinking this way if their employer offers HDHPs. Some business owners are even switching their health care plans so they can take advantage of the tax savings.
You do need to do a good job keeping track of medical expenses and disbursements, so partner with a good CPA or tax team that can help!
Overall I think H.S.As are a fantastic tool and I typically recommend them to anyone that has the option and capacity to use one!
Don't forget to reach out to set up some time!