Every
year around this time I like to assess my finances and
what I need to do to optimize my situation. Making the
most of your HSA is one area that can really make a difference.
Here are the key things you need to know to get the greatest
tax reduction and the most growth out of your HSA.
Maximizing
Your Contribution May Reduce Your Taxes
By $1836 or More
If
you own an HSA-qualified health insurance plan that has
an effective date no later than November 30, 2007, you
qualify to make a tax deductible contribution to your
Health Savings Account. This will immediately reduce
your tax bill come April 15.
The
contribution limit is not pro-rated based on the
number of months in 2007 in which you had coverage, as
it was in the past. However, you do need to remain
an HSA-eligible individual throughout 2008, or the extra
amount contributed will be counted as income and subject
to an additional 10 percent tax.
The
maximum HSA contribution in 2007 is $5650 for families,
and $2850 for individuals. If you are 55 or older,
you may also contribute an additional $800.
Your
HSA contribution is deductible on your federal income
taxes, and every state (except AL, CA, NJ, and WI) also
gives a deduction on state income taxes. So by maximizing
their HSA contribution a family in a 28 percent tax bracket,
paying 4.5 percent state income taxes, will reduce their
April 15 tax burden by $1836.25.
Though
your HSA-qualified health insurance must be in place before
the end of the year, you do have until April 15 to make
your 2007 contribution. Though you cannot put any
more 2007 money in if you miss this deadline, you can
reimburse yourself in later years for qualified expenses
incurred in 2007, even if you do not currently have the
money in your account.
Strategic
Withdrawals
You
can withdraw money from your HSA at any time to pay qualified
medical expenses. Keep in mind that this includes
over-the-counter medications such as aspirin or cough
syrup, dental and vision expenses, and even alternative
care such as acupuncture or homeopathy.
One
strategy that many of our members take is to save their
medical receipts, but to delay reimbursement from the
HSA so that the funds have the opportunity to grow tax-deferred.
There is no time limit in which you must withdraw the
money. Since most people will face larger medical
bills during their retirement, it is quite likely that
the withdrawals would never be subject to taxes.
If
you are not fully funding your Roth, another strategy
would be to reimburse yourself for medical expenses from
your HSA, and to deposit it in your Roth. Your HSA
reimbursement is tax-free, and placing it in your Roth
would also give you tax-free growth while enabling you
to withdraw the money in retirement tax-free for any reason,
including non-medical expenses. You would also avoid
any extra state taxes in the states that currently tax
HSAs.
Remember
to Keep Good Records
You
should keep a record of any qualified medical expenses
you incur. This will ensure that you have documentation
substantiating any tax-free withdrawal you make from your
HSA. In order to pay for a medical expense from
your HSA, it must be a qualified expense.
You
can go low-tech and just put receipts in a file, or get
a little more organized and track your records online.
Many of our members currently use MedBillManager - more
information is available on our Additional
Benefits page.
2008
Contribution Limit and Deductible Changes
In
2008 the maximum annual HSA contribution limit will again
go up, this time to $2900 for individuals and $5800 for
families. Those over age 55 will be allowed to contribute
an additional $900 to their accounts.
The
maximum deductibles will be going up next year to $5600
for individuals, and $11,200 for families. If you've
now got some money socked away in your HSA, it might make
sense to move to a higher deductible to further reduce
your premiums.
Health
Reimbursement Arrangements
If
you are currently set up as an S-corp, you should strongly
consider setting up a Health Reimbursement Arrangement
(HRA). An HRA enables your S-corp to reimburse you
as a tax-free fringe benefit for the cost of your individual
health insurance. This is the only way an S-corp
can legally pay for individual health insurance, and is
saving our average S-corp member over $3000. The
HRA must be established by December 31st in order to take
advantage of it in 2007.
It
may also be beneficial to set up an HRA if you have a
spouse who works in your business. Also, many small
businesses use an HRA to reimburse their employees for
individual health insurance premiums (which is much less
expensive than getting group coverage). More information
and a simple online application is available on our Health
Reimbursement Arrangement page.
What
To Do Now
Here
are the steps you should take now:
-
To maximize the potential growth of your funds, you
should try to fund your account as early in the year
as possible. Every month of tax-deferred growth
does add up over time. You can keep the money
in a savings account, or invest it in stocks or mutual
funds.
-
If you have your health insurance in place but do not
yet have your HSA set up, you may be able to do so at
your local bank, or see our HSA
Administrator page for our recommendations.
-
If you do not yet have an HSA-qualified health insurance
plan, you should apply for coverage as soon as possible.
Your plan must be effective before December 1 in order
for you to qualify for the 2007 tax deduction.
By getting your HSA-qualified health insurance in place
by November 30, not only will you be able to maximize
your tax benefits, but you also may be able to lock
in 2007 rates for the next 12 - 24 months.
-
If you have a small business with employees, are set
up as an S-corp, or have a spouse who works in the business
with you, set up a Health Reimbursement Arrangement.
The cost is only $29 per month and the savings are great.
I
currently have about $23,000 in my own HSA. Last
year I was bragging on the 28% return I'd gotten on my
money. This year wasn't quite as good, but I can't
complain. I plan to make my 2008 contribution in
early January - I think I'll be investing it in some international
funds (but I'm not claiming any investment expertise,
so do your own research...)
