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HSA Opportunities When Cash Flows Are Tight

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Do you have HSA high deductible health insurance that you are not using to its fullest benefit?  In 2018, if you have HSA eligible insurance, meaning you have a plan with the initials “HSA” in the title, it comes with the opportunity to fund a separate voluntary Health Savings Account.  Ideally, you fully fund the HSA so you can deduct every dollar you put in, enjoy tax free growth, and take distributions for qualified medical expenses tax free. On top of the triple tax benefits of this plan, you can use a number of online account options where you can invest it in the market, save it and grow it year after year to create a tremendous medical resource at retirement. If you don’t need it for qualified medical expenses, at age 65 you can take distributions just like a traditional IRA, penalty free as taxable income. If you take distributions before age 65 for non-qualified medical expenses, you get hit with a 20% penalty.

Everyone, including Elon Musk, can deduct contributions to an HSA if they have a qualifying insurance plan.  There is no income limit, no phase out, no AGI hurdle or Schedule A to overcome.  If you are single and have a qualifying insurance plan, you can contribute and deduct up to $3,450. If you are turning 55 or older you can contribute and deduct up to $4,450.  Families can deduct $6,900 and an additional $1,000 for a total of $7,900 for those turning 55 or older in this tax year.

HSAs are great for the years when you have the money to fund them and you are in great health, so you don’t have to use them, but every year isn’t like that.  Regardless, there may still be a financial opportunity in a tight cash flow year.  There is no requirement that the dollars you deducted must stay in your HSA account after you deposit them.  Not even for 5 minutes.  If you find yourself in a poor cash flow year and you have qualified medical expenses, tally them up in December and pass them in and then immediately out of your HSA.  Your HSA can be set up at several local banks, so you could literally walk in the door, make a deposit and take a withdrawal.  You create a tax deduction for yourself on the front page of your 1040, but you’re not out any cash. Your tax professional or Publication 969 from the IRS will give you guidance on what is an eligible HSA expense and it’s your responsibility to keep the receipts to back up your withdrawal.

As you can see, there are many opportunities that exist with the Health Savings Account. As your trusted advisor, we can coordinate with your tax professional to identify and implement the optimal strategy for you based on your whole financial picture.

Connor Michael
Associate Financial Planner

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