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This is probably not the first time you have heard us rave about how great a Health Savings Account is and most likely won’t be the last. But the truth is that most people who have a Health Savings Account (HSA) and contribute to it do not understand how powerful it can be or how to maximize all it has to offer. I’m not going to bore you with all the same basics about the account that you can find in our previous article. What I want to emphasize in this article are the strategies available to maximize your tax savings when using your HSA.
Contributing to an HSA through payroll is a must!
Most people know that HSA contributions are tax deductible or pre-tax, but unlike employer retirement plans (401(k)s, 403(b)s, 457(b)s, etc.), HSA contributions are also deductible from Social Security and Medicare taxes. Therefore, contributing through payroll can save up to an additional 7.65% of tax on contributions above and beyond your Federal and State income tax. Contributions made to a spousal catch-up HSA are not allowed through payroll, therefore are not eligible for the payroll tax savings.
Adult Children are Eligible for HSAs
Obamacare made a change to HSAs that allows adult children who are still on their parents HSA-eligible health insurance plans to be able to contribute the family maximum to their own HSA each year. To do this, the child cannot be claimed as a dependent on their parents’ tax return. It may help to think of the family maximum contributions per tax return rather than per health plan. Further, HSAs allow anyone to contribute money to your HSA. Parents or even grandparents would be able to gift assets to the child to max out the child’s HSA contribution. There are not many ways to gift children money so that they receive tax deductions.
Using Your IRA To Fund Your HSA
Regulations allow for a one-time HSA annual contribution limit transfer to an HSA from an IRA. Thus, if you are not able to contribute to an HSA through work, you could transfer cash from an IRA to fund your HSA. Making the one-time transfer would allow you to pull the money out tax-free to cover medical expenses.
Drugs, Drugs, and More Drugs
Since our last HSA article, there have been changes to what is considered eligible for qualified withdrawals from an HSA. The CARES Act began allowing over-the-counter (OTC) medicines to be eligible, where previously OTC medications only qualified as HSA expenses when prescribed by a physician. The change specifically included feminine products, masks, hand sanitizer, band-aids, eye drops, and many more. To get the full list of changes, use this link: New HSA-eligible expenses
New Custodian Equals New HSA
One strategy when using an HSA has been to accumulate assets in the account while using free cash flow to cover your out-of-pocket medical expenses. While this is an effective way to accumulate a large HSA account for larger medical expenses in the future, we have learned that if your account moves to a new custodian any expenses incurred prior to the new account at the new custodian may no longer be eligible for reimbursement. Therefore, if you know your HSA will be moving to a new custodian, either through your employer or your own decision, reach out to your financial advisor or a tax professional to be sure you know how the change will affect your qualified past unreimbursed medical expenses.
The Health Savings Account is a very powerful tool, since contributions are tax-free in and withdrawals are tax-free out. If you only have so much money to put toward savings from your paycheck, how should you allocate it? First, take the free money, which is the percentage of pay required to reach the maximum employer match on the 401k. Second, contribute the maximum to the HSA. Third, with any remaining funds, return to the retirement plan to contribute up the maximum you can for the year. Everyone should either have or want an HSA. Let your Consulate Advisor know if we can be of assistance with any of the above details.
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