It is often said that growing wealth begins by making simple investments into a savings account over a prolonged period of time. But what would happen to the growth potential of that account if the money in the account could be invested in a high-interest yielding vehicle, such as a stock or a bond? Moreover, just how much money could one save each year if the money they invested into their savings accounts was actually tax-deductible?
The answer: consumers can save thousands of dollars each year simply by putting money into a specific type of savings account: a Health Savings Account, also known as a HSA.
What is a HSA?
An HSA is a specific type of savings account that anyone can open in just a few simple steps. Both individuals as well as families can open an HSA. The differences between an individual-coverage and a family-coverage Health Savings Account have to do with maximum annual contribution amounts to the account and out-of-pocket healthcare expense limits.
Like an IRA, the money that consumers set aside in their Health Savings Accounts can be invested in high-interest CDs, money markets, bonds, stocks, and more. However, contributions that consumers make to their Health Savings Accounts are tax deductible.
In order to have a HSA, participants need to be enrolled in qualifying high-deductible health insurance plans. There is a cap on maximum annual out-of-pocket expenses for these plans; for 2009, the maximum out-of-pocket amount for individual-coverage plans is $5,800 and $11,600 for family-coverage plans. The minimum out-of-pocket amount for a high-deductible health insurance plan for individual coverage is $1,150 and $2,300 for family coverage.
Health Savings Accounts and Taxes
Health Savings Accounts not only help consumers grow their savings, but they also provide generous tax benefits for Health Savings Account participants in a number of different ways:
1. Maximum annual tax deduction – The money that participants deposit in their HSA is deducted from their annual income, which reduces their annual income tax burden. For 2009, the maximum annual contribution that an individual who has self-only coverage can make is $3,000. For a family-coverage Health Savings Account plan, the maximum annual contribution for 2009 is $5,950. Additionally, participants can make catch-up contributions of $1,000 if they are 55 years old or older.
2. Tax-free medical expenses – Many individuals and families are unable to fully fund their HSA each year. The good news is that they can still receive tax benefits when they pay for qualifying medical expenses. In order to receive the tax benefits, these individuals simply need to open a Health Savings Account, deposit the minimum amount of money necessary to open the account, and then only deposit money when they need to pay for a medical expense. In a sense, they will simply filter money through the Health Saving Account instead of paying for healthcare expenses directly. Using this strategy, the money that they spend on healthcare is completely tax deductible.
3. Pay for medical expenses without the HSA and get reimbursed – Another strategy that allows HSA participants to maximize the growth potential of their HSA is to fully fund their Health Savings Accounts but pay for qualifying medical expenses out-of-pocket. At a later date, these individuals can simply reimburse themselves for their expenses from their Health Savings Account funds. Using this strategy, participants will be able to keep their Health Savings Accounts fully funded so they can maximize growth potential on their high-interest investments. The reimbursement is tax-free as long as it reimburses the participant for qualifying health related expenses.
HSA participants should keep in mind that the funds they spend on healthcare expenses are tax-free. However, they can withdraw funds from their Health Savings Accounts at any time to use for other expenses. When they withdraw money to use for other expenses, the withdraw is tax-deferred, which means that they will only pay taxes on the money once they withdraw it, but will not need to pay taxes on the growth within the account.
Opening an HSA is a wise choice for many individuals and families who are looking for ways to be financially savvy and save up to 50 percent in healthcare expenses each year. Opening a Health Savings Account is easy and simply requires participants to enroll in a qualifying high deductible insurance plan. By getting started today, HSA participants can start to save money, reduce their tax burdens, and grow their wealth in effective ways.