Four explanation why you need to open a well being financial savings account
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If you have high deductible health insurance, a health savings account can help pay your medical bills. But HSAs have hidden superpowers that make them a great way for some people to create a tax-free pot of money for retirement or other long-term goals. In the right circumstances, you can even use an HSA to help your young adult children save for their future.
However, not everyone is a good candidate for high deductible health insurance. The minimum deductible that entitles you to use an HSA is $ 1,400 for individual insurance or $ 2,800 for family insurance. Many plans require you to contribute even more before coverage begins. If meeting the high deductible meant hardship or saving you on health care, you would probably be better off choosing a lower deductible policy and skipping an HSA.
If a high deductible policy fits well, you’ll need even more cash to take full advantage of an HSA: enough to pay the deductibles and other healthcare costs out of pocket without tipping into the account. That’s a pretty tall chore, but you can still benefit from an HSA even if you have to spend some of the money along the way.
Here are the four biggest advantages of an HSA.
Superpower 1: You can get triple tax benefits
Health savings accounts offer a rare triple tax break: your contributions are deductible, the money grows with tax breaks, and withdrawals are not taxed if you have qualified medical expenses.
In contrast, withdrawals from other tax-privileged accounts such as 401 (k) s are typically taxed as income. If withdrawals are tax-free – as they can be from Roth IRAs – you didn’t get any tax breaks when you deposited the money.
Continue reading: Get triple the tax breaks with an HSA and find an affordable health plan while you’re at it
Superpower 2: You don’t have to spend the money
Any unspent credits in your HSA can be carried over from year to year. This is in contrast to flexible spending accounts, another tax-privileged way to pay medical expenses. FSAs require users to spend the money within a certain period of time or those contributions will expire.
FSAs allow you to contribute $ 2,750 in 2021. Individuals can donate up to $ 3,600 to an HSA this year, while families can donate up to $ 7,200, and there is a $ 1,000 make-up contribution for those 55 and over.
HSA contributions can be invested – and that means your money can really grow. Even if you have to spend some of the money on the go, the tax-free growth can add up.
Superpower 3: Every payout could potentially be tax-free
As mentioned earlier, withdrawals are tax-free when used for qualified medical expenses, including deductibles and co-payments from health insurance. The IRS maintains a list of eligible expenses that range from acupuncture to X-rays. You can’t double up: only eligible expenses that have not been reimbursed by another source, such as insurance or a flexible expense account, can warrant a tax-free payout.
Most importantly, the IRS doesn’t require you to pay the costs in the same year that you make the payout.
As long as the costs were incurred after the HSA was opened and funded, your payout could be tax-free, even if it’s years or decades later, says financial planner Kelley Long, CPA, personal finance specialist and consumer financial education advocate for the American Institute of CPAs. All you need to do is keep receipts for qualifying expenses in case you are audited by the IRS.
“I call this the shoebox strategy,” says Long. “You keep your receipts because there is no limitation period if you reimburse yourself for eligible expenses.”
Learn more: Get a health savings account now, and you’ll thank yourself for it when you retire
You should protect yourself from the fading of the ink so that you can actually read the receipts years later. She takes a photo of her authorized receipts and saves them in folders marked with the year.
Superpower 4: You can boost your children’s retirement
You can usually have your children after they are 19 or 24. But many children stay with their parents’ health insurance until they are 26, which gives parents a unique planning opportunity, says Mark Luscombe, senior analyst at Wolters Kluwer Tax & Accounting.
A child who is not entitled to maintenance for tax purposes but is still with a parent’s health insurance with a high deductible can set up their own individual HSA. Parents can help by giving the child some or all of the money to fund the account.
Connected: 3 ways parents can save for their child’s future
The child cannot set up its own HSA if it is still claimed as a dependent on the parent’s tax return. And once the child is no longer dependent, the child’s expenses cannot be used for tax-free withdrawals from the parent’s HSA. But this approach gives the child a tax deduction for the contribution and potentially decades of tax-deductible growth – making it a super strategy for those who can swing it.
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Liz Weston writes for NerdWallet. Email: email@example.com. Twitter: @lizweston.