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Imagine if there was a type of investment account that you could save money into before taxes, it grew without taxes, and you could take the money out without taxes.
Does such a thing really exist?
Guess what... yes! It's called and HSA—otherwise known as a Health Savings Account.
There are a few stipulations when using it, so I wanted to talk about the pros and pros of the Health Savings Account. I did that on purpose, since in my eyes there are no cons when it comes to using a Health Savings Account for your financial plans.
1. There is a catch when it comes to Health Savings Accounts. It's not a con, but just a rule… the only people eligible to contribute to a Health Savings Account have to be enrolled in a High Deductible Health Plan (HDHP).
This means that your health care plan needs to have an option to do a low premium and high deductible or out of pocket expense plan. The government creates an incentive for people to pay for things "out of pocket" by reducing the taxability of the account.
The 2019 minimum annual deductible is $1,350 for self-only High Deductible Health Plan coverage and $2,700 for family High Deductible Health Plan coverage. That means that if your plan doesn't have you paying for at least $1,350 of a deductible, it doesn't count as a High Deductible Health Plan.
2. There are no taxes, as long as you use it for qualified health expenses.
That's right... it's pretty much anything medically related.
You can check out what medical expenses are considered to be qualified here, if you're looking for more information.
Even if you get things that are medically related from Amazon, you just need to keep the receipts. However, if you go shopping on Amazon and buy an amazing new drum kit to rock with your band, you will owe taxes.
The account grows without taxes, too! Some Health Savings Account providers will allow you to invest the money into mutual funds. If they receive any dividends or growth, it is tax-free.
The 2019 annual Health Savings Account contribution limit is $3,500 for individuals with self-only High Deductible Health Plan coverage (a $50 increase from 2018) and $7,000 for individuals with family High Deductible Health Plan coverage (a $100 increase from the restored 2018 limit).
3. It is an effective savings tool to use in retirement!
Think about it, typically the number one expense in retirement is…
Yep, healthcare. As if that's any surprise.
If you were to save in a Health Savings Account for 20 or 30 years, then you'd have a big chunk of change that would, essentially, be discounted 20 or 30 percent because there wouldn't be any taxes!
Many high net-worth families are thinking this way if their employer offers High Deductible Health Plans. Some business owners are even switching their health care plans so they can take advantage of the tax savings, which makes sense!
You do need to do a good job of keeping track of medical expenses and disbursements, so partner with a good CPA or tax team that can help you with that!
Overall, I think HSAs are a fantastic tool and I typically recommend them to anyone that has the option and capacity to use one!
Don't forget to reach out to set up some time to chat about your finances, and the possibility of using a Health Savings Account! You can click this link to find a time.