Using a Health Savings Account for Long-Range Tax Savings

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Health Savings Accounts: you are eligible if you are covered by a high-deductible health plan. Using a Health Savings Account can help you gain a significant tax advantage over the year rather than to just simply cover your current year medical expenses.

The contributions are deductible, up to $6,650 for a (qualified) family in 2015, which is a slight increase from $6,550 for 2014. For singles, the limit is $3,350 for 2015 vs. $3,300 for 2014. Similar to IRAs, there is a catch up provision for those who have reached age 55 and over; they can add an extra $1,000 contribution each year. To be considered a qualified individual, you must have a designated high deductible health insurance plan (typically referred to as a HDHP by insurance companies) with a deductible of $2,500 or more for a family and $1,250 for singles.

A little know kicker is that a person who is also age 55 or older and whose spouse elects to contribute the maximum $7,550 for 2014 for the family, can also contribute his or her $1,000 catch-up contribution as long as it is made to a separate account. Thus, the maximum “family plus spouse” contribution when both spouses are age 55 or over is $8,550 for 2014.

In order to increase your tax savings over time, consider saving your out-of-pocket receipts, but do not reimburse yourself yet. Instead, put the receipts in a file to be reimbursed later. Those funds can be invested just as you would those in an IRA, making sure the custodian you select allows investments that you want to make. The law designed to promote savings for medical expenses allows you to reimburse yourself for current medical expenses at a much later date while your contributions continue to earn tax-free income.

The rule is that as long as your distributions are to reimburse you for medical expenses, they will be tax-free even if not made until say 15 years or more later. Not only will you have benefited from the tax deductions for the contributions, but you will also benefit from the tax free compounding of the money in your Health Savings Account. The tax free distributions will allow you to reimburse yourself for medical expenses paid starting with the date the Health Savings Account was opened.

The Health Savings Account funds can also be a great way to reimburse yourself for Medicare premiums. There are considerations to plan for in case of death. While a surviving spouse can treat an inherited Health Savings Account as their own, the liquidation of the Health Savings Account needs to occur shortly after the death of the account owner to avoid becoming taxable to non-spousal heirs. As with any tax deduction, there are rules to follow in order to benefit from this strategy, so be certain to discuss it with your professional tax advisor.