With the second quarter tax deadline quickly approaching, some taxpayers and business owners are looking to make wise money choices.
One option to consider is adding money to your HSA (health savings account). In order to have an HSA, you must have a high-deductible health insurance plan, not an HMO or PPO plan.
HSA contributions allow you to put aside pre-tax dollars for future medical expenses. Distributions from your HSA can be tax-free as well.
Using your HSA as a tax-planning tool
Did you know HSA earnings (such as interest and dividends from the money contributed to an HSA) are tax-exempt at the federal level?
You do have a limit for how much you can add to your HSA. Contribution limits are $3,500 for self-only HSAs in 2019, or $7,000 for family HSAs. Money contributed by your employer does count toward these thresholds. Those who are age 50 or older can contribute an additional $1,000.
HSAs achieve tax savings in other ways as well. You will accumulate earnings and income and can roll over the account year-to-year, unlike flexible spending accounts, where contributions are lost if they’re not used that year.
Withdrawals from an HSA are tax-free as long as you use the money to pay for qualified medical expenses (the IRS has a specific list of qualified expenses). Money held inside an HSA can be withdrawn at any time for medical expenses.
Basically, an HSA helps you build tax-free savings for future medical expenses as you age. One caveat: Individuals enrolled in any part of Medicare may not contribute to an HSA, although HSA funds contributed earlier may be used to pay for qualified medical expenses on a tax-free basis.
HSAs offer people with few medical expenses a tax deduction upfront in the year that contributions are made.