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December
2 , 2005
Year-end
HSA Strategies
2006
is just around the corner, and there are several issues
to consider if you currently have an HSA, or are planning
on getting one in 2006.
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Contribution
Limits and Deadlines
100% of
the deposit you place in your HSA is deductible on your federal
income taxes. All but a handful of states also make
HSA contributions tax-deductible on state income taxes.
If you are looking to reduce your 2005 tax burden and/or put
away more money for retirement, your HSA is the first place
you should put your money if you have not yet maximized your
contribution.
The maximum
you can contribute to your HSA in 2005 is the lesser amount
of your deductible, or $2,650 for singles and $5,250 for families.
Individuals who are 55 or older may contribute an additional
$600.
Note:
this is no longer the case in 2007 and beyond. Please
see our HSA Info page for
complete details.
You
have until April 15 to make your 2005 contribution.
If you do not fully fund your account for the current year,
you cannot make a catch-up contribution for 2005 after this
deadline. However, you can reimburse yourself in later
years for qualified expenses incurred in 2005, even if you
do not have the funds in your account to reimburse yourself
at this time.
In 2006,
the maximum annual HSA contribution will go up to $2,700 for
individuals and $5,450 for families, and people 55 or older
will be allowed to contribute an additional $700.
To
maximize your tax benefit for 2006, it is important to have
your HSA-qualified health coverage in place no later than
January 1.
Record
Keeping
In order
to pay for a medical expense from your HSA, it must be a qualified
expense. In previous
issues I have discussed some of these qualified expenses,
including dental expenses, eyeglasses, chiropractor visits,
over-the-counter medications, and sometimes even nutritional
supplements. Please see our qualified
expenses page for more details.
Now is
a good time to make sure you have an accurate record of your
medical expenses for the year. Make sure you separate
the expenses for which you have reimbursed yourself from your
HSA from those that you paid for out-of-pocket. You'll
want to keep receipts for all medical expenditures paid from
your HSA with your 2005 tax records. Place the "non-reimbursed
medical expenses" in a separate file, keeping them with
the concurrent year's tax records in whatever year you decide
to reimburse yourself.
Over-funded
Accounts
The penalty
for over-funding your HSA is a whopping 6%. I actually
over-funded my own account, because I had set it up in January
yet made the maximum deposit as if it had been in effect since
January 1. (Yes, I should have known better!)
You have
until April 15, 2006 to withdraw excess funds for the 2005
tax year to avoid the penalty. My HSA administrator fortunately notified me of my mistake, but they had no obligation
to do so. It is your responsibility, so make sure you
check into this if you think you may have over-funded you
account.
2006
Deductible Changes
The minimum
deductible for HSA-compatible health insurance plans in 2005
was $1,000 for individuals and $2,100 for families.
In 2006 this will increase to $1,050 for individuals and $2,100
for families. If you currently have an HSA-qualified
plan with the lowest eligible 2005 deductible, that deductible
will automatically go up on January 1 to the new minimum.
Strategies
to Maximize Your Tax Benefits
There
are basically three different strategies you can take when
deciding how to fund your health savings account.
- Put
no money in the account, except when you incur a medical
expense. This strategy allows you to legally "launder"
any money used to pay medical expenses. In other words,
by depositing money into your HSA, then immediately withdrawing
it to reimburse yourself for medical expenses, you are making
your medical expenses all tax-deductible. You may
want to use this strategy if you are on a tight budget and
want to keep your cash outlay as low as possible.
- Fully
fund the account, or at least put in as much as possible
based on your budget. Take money out of the account
any time medical expenses are incurred, and let the rest
grow tax-deferred. This strategy will maximize your
tax deduction, while making your HSA funds available to
pay any non-covered medical expenses before your deductible
is met.
- Fully
fund the account, but pay all medical expenses from a non-HSA
account. Reimburse yourself for medical expenses at
a later date. This strategy will allow you to maximize
your tax deduction, and will also allow you to maximize
the tax-deferred growth of your HSA. You can then
reimburse yourself, tax-free, at any time in the future
for medical expenses incurred over the ensuing years.
(For an example of this strategy, see Maximize
Your HSA, Issue 3).
To maximize
the potential growth of your funds, you may want to make your
2006 deposits as early in the year as possible. Any
growth in your account is tax-deferred, like an IRA. I plan
on making my deposit the first week in January.
If you
do not yet have an HSA-qualified health insurance plan, please
give us a call at 866-749- 2039 as soon as possible.
By getting your HSA-qualified health insurance in place by
January 1, not only will you be able to maximize your tax
benefits, but you also may be able to lock in 2005 rates for
the next 12 - 24 months.
To your
health and wealth,
Wiley
Long
President - HSA
for America
P.S. Every December I write out my goals and objectives
for the next 12 months. Finance and health are two areas
I always spend some time thinking about. By staying
healthy, I expect to build a nice second retirement account
with my HSA. Next month I'll cover some lifestyle strategies
that you may want to adopt as part of your New Year's resolutions,
that have the potential to dramatically improve your health
(and wealth) over the coming years.
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