With health expenses on the rise, many people are looking for ways to reduce the amount they have to spend across the board. One tool some investors are turning towards for their medical expenses is the Health Savings Account, or HSA.
A Health Savings Accounts is a useful investment vehicle that can be used to save for medical expenses and reduce your taxable income. At Quest, Health Savings Accounts can be self-directed to invest in all sorts of alternative investments that can grow the account, and then be used to take qualified distributions tax-free. However, these accounts aren’t for anyone. Certain qualifications limit some people from being able to have this account.
So, how do you know if it’s right for you? In order to qualify for an HSA, you must be enrolled in a high-deductible health insurance plan (HDHP). HDHPs aren’t always the best option for some people and may be better off with an insurance plan, but in most cases, the HSA allows investors that qualify the freedom to invest tax free.
Since these plans are re-defined each year by the IRS, the minimum deductible they must have and the maximum amount a plan-holder can spend out-of-pocket is always being re-determined. Visiting healthcare.gov can provide some of the current amounts, but it is very important to look for plans specifically listed as “HSA-compatible” if this account is one you are considering. Some employers that offer high-deductible health plans also offer HSAs, but if not, opening a separate HSA account (as long as you have a qualifying plan) is always possible.
Why Someone Would Want A Self-Directed HSA
Health Savings Accounts offer quite a few advantages. Of course, one is the freedom to invest beyond the common public assets. But, there is more to an HSA than that!
Being able to take tax-free distributions for qualified health expenses is arguably the biggest reason why most people chose to open a self-directed HSA. Other reasons such as flexibility and additional tax advantages are also positive attributes to consider when thinking about a Health Savings Account.
Unlike a Flexible Spending Account, HSA balances roll over every year, so you never have to worry about losing your savings at the end of the year. Even if you can no longer contribute to an HSA (once you turn 65 or become enrolled in Medicare), you can always continue to use the money for out-of-pocket qualified medical expenses. However, if you use the money on non-eligible expenses, you would still have to pay income tax on that amount and an additional 20% penalty if you were still under the age of 65.
The HSA has aptly earned the name of “The Best Of Both Worlds Account” and rightfully so. When you contribute to an HSA, those funds are either tax-deductible (if you opened your own account) or pre-tax through payroll deductions (if through an employer), and as the account grows, you do not pay any taxes during this time.
Then, when you go to take a distribution for an eligible health expense, once again there are no taxes on those withdrawals. Contributions to Health Savings Accounts do not add to your tax burden and you are actually taxed as if you make less money. That is a great tax advantage!
Growing Your Health Savings Account
Beyond investing to grow your account, you are allowed to add a portion to the account each year to give it a little boost! You can decide how much you want to contribute to your Health Savings Account, up to the contribution limit.
There are regulated maximums that you cannot exceed, but for 2020, for example, the limit is $3,550 for individuals and $7,100 for families, plus an additional $1,000 “catch-up” contribution for anyone age 55 or older by the end of the tax year.
The good news is, contributions can come from multiple different people: you, your employer, a relative or anyone else who wants to add to your account is able to do so as long as they are an eligible individual.
It is important to stay up to date with recordkeeping. As the account holder, you need to keep receipts in order to prove that your withdrawals were used for qualified health expenses, if ever audited by the IRS. But, other than the minor receipt log, taking tax free distributions are simple.
For some custodians, you obtain a debit card or checks linked to your account, and at others custodians, like Quest, you simply need to just call and the money is distributed to you for the qualifying expense without needing to submit the receipts.
What IS a Qualified Medical Expense?
The term “qualified medical expense” is actually broad, and in most cases you will find that what you need for your health, is most likely considered qualified. These can include anything from deductibles, copays and coinsurance, plus other qualified medical expenses not covered by your plan like medical supplies, over the counter medicines, and a wide range of medical, dental and mental health services.
It is important to note that insurance premiums usually cannot be paid for with HSA withdrawals. The key takeaway here is that many expenses qualify and if you would ever like to see the eligible expenses, they are defined in IRS Publication 502, Medical and Dental Expenses.
If you ever have any questions about the HSA or if something may or may not be a qualified health expense, feel free to call our office at 855-FUN-IRAS and we can provide all the information you need to decide if the Health Savings Account is right for you!
Final Takeaway – COVID UPDATES regarding the HSA:
High Deductible Health Plans can cover Coronavirus costs. The Internal Revenue Service advised that high-deductible health plans (HDHPs) can pay for 2019 Novel Coronavirus (COVID-19)-related testing and treatment, without jeopardizing their status. This also means that an individual with a high deductible health plan that covers these costs may continue to contribute to a Health Savings Account (HSA).