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.
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.
To your health and wealth,
Wiley
Long
President - HSA
for America
P.S. - Next month we'll announce our Member Benefits page,
where you can find ways to lower your costs on prescription
drugs, lab costs, hospital bills, and more.
P.S.S.
- As an HSA owner, be part of the change in health care.
Demand price transparency, and shop your medical services.
Let your friends know about Health Savings Accounts, how low your insurance
premium is, how much you save on your taxes, and how much
your account will be worth when you retire. As thousands
of people begin asking simple questions like "how much
does it cost" and "can I get a better value somewhere
else," medical service providers will have to respond.
The result will be lower costs and better service for all.
