As the calendar rolls over to August and families start thinking about back to school and the opening kickoff of football season, that also means annual enrollment at work will be upon us soon. Before you simply login and renew all options consistent to what you selected during last year's annual enrollment, stop and check if your employer offer a high deductible health plan.
What do you mean by high deductible?
For 2019, the deductible for single coverage has to be at least $1,350 while the family coverage deductible has to be at least $2,700 for the plan to be considered a high deductible plan.
Why should I consider a high deductible if my employer also offers plans that have low or even no deductible?
By choosing a high deductible health plan, you open up the possibility of funding a Health Savings Account or HSA.
A Health Savings Account (HSA) gives people an efficient way to pay out-of-pocket health insurance expenses. The key benefit of an HSA is that it allows people to put away a portion of their paycheck without being taxed. Many people consider it to be one of the most efficient ways to save, regardless of whether a person is saving to build up a medical "emergency fund" or their long-term future. It can be helpful to learn more about how HSAs are commonly used to see if this option is right for you.
Income and Deductibles
Typically, those who opt for an HSA have a high deductible that they likely wouldn't be able to pay if they didn't make provisions over time to do so. For example, if a person makes $30,000 a year after taxes and they have a $6,000 deductible, then they would be giving up a full 20% of their income if they have major medical expenses.
HSAs are commonly offered by health insurance companies, so an individual can sign up for the account simultaneously to signing up for their health insurance plan. The government is incentivizing policyholders to prepare for emergencies, so there are fewer delinquent policies. If your insurance policy doesn't offer an HSA option, it's possible to open a separate account at practically any financial institution.
Reducing Your Taxable Income
Having money taken out of your income tax-free is a way to reduce the amount of taxable income you make a year. It helps you maximize your income while simultaneously safeguarding against emergency health situations. Individuals who contribute $2,000 to their HSA a year will be taxed as though they make $2,000 less than their standard income. The money you contribute to your HSA will roll over from year to year, which means the insured can grow their emergency funds over time. While these funds typically can't be used to pay for insurance premiums, they can be used to pay for co-pays, deductibles, and other eligible non-covered expenses.
The government has placed restrictions on how much a person can contribute to their HSA based on their age and marital status, and these restrictions change every year. For individuals, the current maximum is $3,400 and $6,850 for a family.1 Adults over the age of 55 are allowed to contribute an extra $1,000 or more. If you choose to open an HSA, you must make contributions in cash as opposed to other types of property, including stocks or bonds. Employers and family are allowed to contribute to an HSA on behalf of the individual. The contribution limits for employers generally change every year as well.
How to Use It
Some people use their HSA as a straight savings account while others may choose to invest the money in mutual funds or stocks. In fact, some financial experts view the HSA as a better financial move than investing in a typical retirement account. When it comes to an IRA, individuals are required to withdraw from the account once they reach the age of 70.5, but an HSA allows people to continue contributing to it tax-free with no such requirement. The income deposited is also not subject to the FICA tax that goes toward social security and Medicare, while an IRA would be subject to the additional tax. HSAs are also allowed to be used for non-eligible expenses, though they will be taxed as income if the individual chooses to do so.
An HSA can be helpful for anyone who hopes to be able to pay their health insurance expenses immediately. They may be more commonly chosen by those with high deductibles, but the truth is that practically anyone can benefit from the tax-free incentives if they so choose.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.