A Health Savings Account can be an important part of your
tax and money-management strategy. Not only can you reduce
your health insurance premiums, but when you fund your
account you get a nice tax break. If you stay healthy, that
money grows tax-deferred like an IRA, and can amount to a
lot of money in retirement.
Every year around this time you should assess your finances
and see what you need to do to optimize your situation.
Making the most of your HSA is one area that can really
make a difference. Here are the key things you need to know
to get the greatest tax reduction and the most growth out
of your HSA.
Maximizing Your Contribution May Reduce Your Taxes By $1836
or More
If you own an HSA-qualified health insurance plan that has
an effective date no later than December 31, 2007, you
qualify to make a tax deductible contribution to your
Health Savings Account. This will immediately reduce your
tax bill come April 15.
The contribution limit is not pro-rated based on the number
of months in 2007 in which you had coverage, as it was in
the past. However, you do need to remain an HSA-eligible
individual throughout 2008, or the extra amount contributed
will be counted as income and subject to an additional 10
percent tax.
The maximum HSA contribution in 2007 is $5650 for families,
and $2850 for individuals. If you are 55 or older, you may
also contribute an additional $800.
Your HSA contribution is deductible on your federal income
taxes, and every state (except AL, CA, NJ, and WI) also
gives a deduction on state income taxes. So by maximizing
their HSA contribution a family in a 28 percent tax
bracket, paying 4.5 percent state income taxes, will reduce
their April 15 tax burden by $1836.25.
Though your HSA-qualified health insurance must be in place
before the end of the year, you do have until April 15 to
make your 2007 contribution. Though you cannot put any
more 2007 money in if you miss this deadline, you can
reimburse yourself in later years for qualified expenses
incurred in 2007, even if you do not currently have the
money in your account.
Strategic Withdrawals
You can withdraw money from your HSA at any time to pay
qualified medical expenses. Keep in mind that this
includes over-the-counter medications such as aspirin or
cough syrup, dental and vision expenses, and even
alternative care such as acupuncture or homeopathy.
One strategy that many of our members take is to save their
medical receipts, but to delay reimbursement from the HSA
so that the funds have the opportunity to grow
tax-deferred. There is no time limit in which you must
withdraw the money. Since most people will face larger
medical bills during their retirement, it is quite likely
that the withdrawals would never be subject to taxes.
If you are not fully funding your Roth, another strategy
would be to reimburse yourself for medical expenses from
your HSA, and to deposit it in your Roth. Your HSA
reimbursement is tax-free, and placing it in your Roth
would also give you tax-free growth while enabling you to
withdraw the money in retirement tax-free for any reason,
including non-medical expenses. You would also avoid any
extra state taxes in the states that currently tax HSAs.
Remember to Keep Good Records
You should keep a record of any qualified medical expenses
you incur. This will ensure that you have documentation
substantiating any tax-free withdrawal you make from your
HSA. In order to pay for a medical expense from your HSA,
it must be a qualified expense.
You can go low-tech and just put receipts in a file, or get
a little more organized and track your records online.
2008 Contribution Limit and Deductible Changes
In 2008 the maximum annual HSA contribution limit will
again go up, this time to $2900 for individuals and $5800
for families. Those over age 55 will be allowed to
contribute an additional $900 to their accounts.
The maximum deductibles will be going up next year to $5600
for individuals, and $11,200 for families. If you've now
got some money socked away in your HSA, it might make sense
to move to a higher deductible to further reduce your
premiums.
Health Reimbursement Arrangements
If you are currently set up as an S-corp, you should
strongly consider setting up a Health Reimbursement
Arrangement (HRA). An HRA enables your S-corp to reimburse
you as a tax-free fringe benefit for the cost of your
individual health insurance. This is the only way an
S-corp can legally pay for individual health insurance, and
is saving our average S-corp member over $3000. The HRA
must be established by December 31st in order to take
advantage of it in 2007.
It may also be beneficial to set up an HRA if you have a
spouse who works in your business. Also, many small
businesses use an HRA to reimburse their employees for
individual health insurance premiums (which is much less
expensive than getting group coverage). More information
and a simple online application is available on our Health
Reimbursement Arrangement page.
What to Do Now
Here are the steps you should take now:
1. To maximize the potential growth of your funds, you
should try to fund your account as early in the year as
possible. Every month of tax-deferred growth does add up
over time. You can keep the money in a savings account, or
invest it in stocks or mutual funds.
2. If you have your health insurance in place but do not
yet have your HSA set up, you can do so online or possibly
your local bank.
3. If you do not yet have an HSA-qualified health insurance
plan, you should apply for coverage as soon as possible.
Your plan must be effective before January 1 in order for
you to qualify for the 2007 tax deduction. By getting your
HSA-qualified health insurance in place by January 1, not
only will you be able to maximize your tax benefits, but
you also may be able to lock in 2007 rates for the next 12
- 24 months.
4. If you have a small business with employees, are set up
as an S-corp, or have a spouse who works in the business
with you, you should set up a Health Reimbursement
Arrangement.
Through HSAs and HRAs, individuals who pay for their own
health insurance have some powerful tax reduction
strategies at their disposal. December 31st is the
deadline for obtaining 2007 tax deductions, so you should
act quickly if these ideas make sense for your situation.
----------------------------------------------------
By Wiley Long - President, HSA for America
(http://www.health--savings--accounts.com ) - The nation's
leading independent health insurance firm specializing in
individual and family coverage that works with a Health
Savings Account.
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