The
Triple Tax Savings of HSAs
Health
Savings Accounts offer a triple tax advantage. First,
any money you put into the HSA is 100% tax deductible, as
an "above-the-line" deduction found on line 25
of the 2006 IRS Form 1040. Secondly, any money in the account
grows tax-deferred, just like an IRA. And the third
tax advantage, offered by no other investment opportunity,
is that withdrawals are tax-free if they are used to cover
qualified medical expenses.
You
have until April 16 to make your 2006 contribution.
A deposit can be made for up to $2,700 for individuals in
2006 ($2,850 in 2007), and $5,450 for families ($5,650 in
2007). If you had an HSA in 2006, your contribution
limit is pro-rated based on the number of months you had
the plan.
There
are no deadlines for when withdrawals must take place.
Take
Advantage of the Tax-Deferred Growth
Because
your investment in an HSA grows tax-deferred, it will grow
much more rapidly than a taxable investment. As an
example, an investment of $5,000 per year in a tax-free
account that earns a 15% rate of return will be worth $2,173,725
in 30 years. If the earnings are taxed each year at
a rate of 28% Federal income tax and 5% state income tax,
your money will only be worth $822,470.
Smart
investors understand that the best strategy is to maximize
your HSA contribution and minimize any withdrawals.
If you do incur out-of-pocket medical expenses, your best
option is to take the money from somewhere else to pay that
bill. But - and this is very important - save your
receipts, because you can reimburse yourself from your HSA
at a future date. As long as you can show that the
withdrawal is going to cover a qualified medical expense
that occurred after you opened your HSA (even one that occurred
25 years previously!), you will owe no taxes on that withdrawal.
Whatcha
Gonna Do With All That Money?
On the
Long's Strange Trip, Chitwan, Nepal
Before
our son was born, Christie and I took a year off to travel
around the world. We made it to Mexico, Peru, Morocco,
Egypt, Turkey, Greece, India, Nepal, Thailand, and Bali,
and cataloged the experience on a website, www.longsstrangetrip.com.
When we first started pondering the idea and where we wanted
to go, my initial thought was "everywhere!"
But I quickly realized what a big world it is, and how short
a period a year really is.
So
we want to get out there and do it again. About the
time Wiley graduates from college we'll be in our early
60's, and just may be ready to hang out on a deserted island
in the South Pacific for a few months. Or maybe it'll
be Paris, Prague, or who knows where. In any case,
I expect the money in our HSA will provide the additional
financial security that will allow us to make this happen.
I've been maximizing my HSA contributions, investing the
money in mutual funds, and not withdrawing anything.
For all the medical expenses I've incurred, I've been stuffing
the receipts in a folder called "Unreimbursed Medical
Expenses".
Keep
Track of Which Expenses You've Reimbursed
When
you make a withdrawal from your HSA, the HSA custodian will
generate a 1099-SA that shows the amount of the distribution.
You will then need to reflect that distribution on your
1040 and complete Form 8889. If the distribution is
for medical expenses, it will not be taxable income.
Though
my strategy above is perfectly sound, I can just imagine
the look on an IRS agent's face when I bring in a shoebox
full of 20 year old medical receipts that justify the $50,000
I withdraw from my HSA when I'm ready to reimburse myself.
So I've recently decided to get a little more organized.
There
are several medical bill management software programs now
available. I am now using an online service called
MedBillManager. It will help you keep track
of what bills have been paid, what's owed, and when it's
due - it is invaluable just to make sure that you are not
being over-billed. But even more important for the
topic we're discussing, this service will keep track of
what expenses are reimbursable from your HSA, and whether
or not you have made that withdrawal.
Another
Member Benefit
HSA
for America has negotiated a special arrangement
for our members and readers of Maximize Your HSA.
Go to http://HSAforAmerica.medbillmanager.com,
and sign up for a free 90 day trial. Start tracking
all your medical expenses, including bottles of aspirin,
chiropractor visits, or anything else. Invest your
HSA in a good mutual fund, let it grow, and pay yourself
back in 20 years or so, confident that you've got the records
to support your tax-free withdrawal. HSA
for America members who sign up through
this link will receive a special discounted rate of only
$19.95 per year.
We
will continue to introduce you to ways you can save money
and maximize the benefits you get from having an HSA.
Please keep in touch, and let me know how your HSA is benefiting
you.
