If you’re enrolled in a high deductible health insurance plan, you might have access to a health savings account. It’s designed to help you save money towards the cost of future medical expenses, but it can also double as a retirement account. An HSA comes with lots of tax advantages and if you’re not contributing to one, here’s what you could be missing out on.
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1. Tax-Deductible Contributions
When you’re trying to lower your tax bill, it’s in your best interest to claim every deduction possible. Deductions reduce your taxable income, which can potentially push you into a lower tax bracket. With an HSA, you’re allowed to write-off the money you contribute for the year.
For tax year 2016, the contribution limits are set at $3,350 if you have individual coverage and $6,750 for families. You can kick in an extra $1,000 if you’re age 55 or older.
You have until the annual filing deadline to make contributions for the previous tax year. So if you’re scrambling to find some last-minute tax breaks, maxing out your HSA can be a big help. The best part is, you don’t have to itemize to claim the deduction.
2. Tax-Free Withdrawals for Qualified Expenses
Normally, when you chip in money to a tax-advantaged account such as a 401(k) or an IRA, you’re expected to pay taxes on the money once you start making withdrawals. When you take a distribution from an HSA, on the other hand, you typically won’t pay any taxes as long as you’re using the money for qualified medical expenses.
If you decide to use HSA funds for something other than healthcare, you might have to pay regular income tax on the money along with an additional 20% tax penalty. If you’re over age 65, however, the 20% penalty is waived and the distribution would just be taxed at your regular rate. That could really come in handy if you need an additional source of income in retirement.
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3. Earnings Grow Tax-Free
When you sign up for a health savings account, one of the most important things you’ll have to think about is how you’re going to invest the money you’ve saved. Depending on who you’ve got your health insurance with, you may have a wide range of options to choose from. Picking the right mix of investments is key to maximizing your earnings.
One of the great things about an HSA is that no matter how much your account increases in value over time, your earnings normally aren’t subject to tax. Since you’re not required to tap your HSA until you actually need it, you can sit back and watch your money grow without having to worry about a tax penalty.
Related Article: All About Required Minimum Distributions
Don’t Leave Your HSA Funds Behind
If you decide to part ways with your employer, you’ll want to make sure you’re bringing your HSA along for the ride. Like a 401(k), it’s possible to roll your old HSA over into a new one when you start your new job.
You’ll have 60 days to deposit your savings into your new HSA account. If you waste too much time, they might be subject to taxes and penalties.
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