Health Saving Accounts (HSAs) are the triple crown of tax favored healthcare accounts. You probably knew that they let you spend the money and save tax now. You also probably got them confused with all those other tricky FSAs...
Health Saving Accounts (HSAs) are the triple crown of tax favored healthcare accounts.
You probably knew that they let you spend the money and save tax now. You also probably got them confused with all those other tricky FSAs or HRAs or MSAs with all the weird rules where you have to spend the money.
Did you know how great HSAs could be for retirement planning?
Most retirement accounts have you paying tax either now or later and place restrictions on when you can use the money. HSAs do neither and you never pay tax on money invested in them. So, yeah, you get an immediate tax benefit on your 20** tax return and even more tax savings when you leave the money in the account for health care expenses later in life.
Here is what you get:
a) now - A tax deduction for money going in.
b) during - Tax free investment gains / while the money is in the account. (use the money now or later)
c) later - Tax free distributions (before or after retirement) on qualified medical expenses (including copays)
NOTE : The CARES Act modified the term "qualified medical expenses" (i.e. those that may be reimbursed from an HSA). We are excited that the cost of menstrual care products (finally) and many more over-the-counter products and medications are finally reimbursable without a prescription.
We love HSA’s so much that we want to explain it in the following scenario:
So here goes…
Morty is 54 and has to pay for $10,000 to Dr. R. Sanchez DDS for some dental work. (sigh, C’est la vie)
Bill payment Scenario 1 - Morty can pay this out of his bank account. To get $10k into his bank account he would ordinarily needed to labor to earn about $13,500 in wages (payroll tax plus Federal and state income taxes about 35%).
Bill payment Scenario 2 – Morty can pay from his HSA account because he was smart and put $7000 (pre-tax at the family maximum) into an HSA when he was 35. Using the HSA trading app, Morty invested in low-risk investment earnings and easily gained $3000 on his $7000 investment.
The second scenario wins (big) because Morty worked less and spent less. He only had to work to earn $7,000 in wages to pay for the bill and the tax free investment gains pay the rest. He pays Zero tax on any money needed to pay that bill; basically, he worked 48% less to pay the same Sanchez.
It was also super easy to set up in 15 minutes online.
QUESTION FROM SAID AUDIENCE : Don’t I have to have a HDHP / High Deductible Health insurance Plan? Because deductibles are… not my favorite…
The possibility that Morty pays a little more deductible during the year is likely; but more likely than not he will make up for most of that in year 1 with a tax deduction now. Similarly, If he had a $1000 deductible before and was not ordinarily meeting his deductible, he was probably both paying too much for health insurance to begin with while losing the opportunity to put money into an HSA.
The monthly savings for the risk of using High Deductible Health Insurance plan (i.e. $1400 deductible for individual and $2800 for whole family) may be low but the benefits stated above often far outweigh the out of pocket cost for the deductible especially given a few years of tax free growth in the HSA account. AND Morty can also pay these same deductibles and co-payments from his HSA tax-free.
So if you have an HDHP for December 20X1 coverage, open up an HSA (online or with your broker). You have until April 15th 20X2 to fund the account. If you have questions, you should hire us for tax prep and talk about this during your tax interview.
We will help you make so many good decisions!
Written by Lyle Phipps, CPA for Prepared Accounting PC
BONUS : Here are a few examples of qualified medical expenses that you might not have know about:
Acupuncture
Alcoholism treatment
Allergy medicine
Ambulance
Analgesics
Antacids
Antibiotic ointments
Anti-itch creams
Arthritis gloves
Artificial limbs
Artificial teeth
Aspirin
Bactine
Bandages, for torn or injured skin
Birth-control pills
Blood-pressure monitoring devices
Blood-sugar test kits and test strips
Body scans
Braille books and magazines
Breast pumps
Breast reconstruction surgery following mastectomy
Calamine lotion
Cancer screenings
Carpal tunnel wrist supports
Chelation therapy
Chiropractors
Cholesterol test kits
Circumcision
Co-insurance amounts
Cold medicine
Cold sore medicine
Condoms
Contact lenses, materials, and equipment
Co-payments
Cough suppressants
CPAP (continuous positive airway pressure) devices
Crutches
Decongestants
Deductibles
Dental sealants
Dentures and denture adhesives
Diabetic supplies
Diagnostic items/services
Diaper rash ointments and creams
Diarrhea medicine
Drug addiction treatment
Drug overdose, treatment of
Durable medical equipment
Ear wax removal drops
Eczema treatments
Expectorants
Eye drops
Eye examinations, eyeglasses, equipment, and materials
Fever-reducing medications
First aid cream
First aid kits
Flu shots
Fluoridation services
Gauze pads
Glucose-monitoring equipment
Headache medications
Hearing aids
Hearing aid batteries
Hemorrhoid treatments
Hospital services
Humidifier
Immunizations
Incontinence supplies
Insect-bite creams and ointments
Insulin
Laboratory fees
Lactation consultant
Laser eye surgery, Lasik
Laxatives
Lice treatment
Lip products, medicated
Liquid adhesive for small cuts
Lodging at a hospital or similar institution
Mastectomy-related special bras
Maxi pads
Medical alert bracelet or necklace
Medical monitoring and testing devices
Medical records charges
Menstrual care products
Menstrual cup
Menstrual pain relievers
Menstrual sponge
Midwife
“Morning-after” contraceptive pills
Motion sickness pills
Motion sickness wristbands
Nicotine gum or patches
Norplant insertion or removal
Obstetrical expenses
Occlusal guards to prevent teeth grinding
Occupational therapy
Online or telephone consultation
Operations, non-cosmetic
Optometrist
Organ donors
Orthodontia
Orthopedic shoe inserts
Osteopath fees
Ovulation monitor
Oxygen
Pain relievers (Examples: Advil, Aspirin, Tylenol)
Pantyliners or underwear liners
Physical exams
Physical therapy
Pregnancy test kits
Preventive care screenings
Prosthesis
Psychiatric care
Radial keratotomy
Reading glasses
Rehydration solution
Rubbing alcohol
Safety glasses
Screening tests
Shipping and handling fees
Sinus medications
Sleep-deprivation treatment
Smoking-cessation medications
Smoking-cessation programs
Speech therapy
Spermicidal foam
Sterilization procedures
Stop-smoking program
Supplies to treat medical condition
Support braces
Surgery
Tampons
Taxes on medical services and products
Telemedicine
Telephone equipment for persons with hearing or speech disabilities
Thermometers
Throat lozenges
Toothache and teething pain relievers
Transplants
Transportation expenses for person to receive medical care
Tuition evidencing separate breakdown for medical expenses
Vaccines
Vasectomy
Vasectomy reversal
Viagra
Vision correction procedures
Walkers
Wart remover treatments
Wheelchair
X-ray fees
Yeast infection medications