Health Savings Accounts (HSA)
Doctors are not the only ones that miss this deduction as a large percentage of prospects and customers I assist fail to consider this alternative as part of a holistic financial planning strategy. Some even call this the “Stealth IRA” because it is essentially triple tax exempt.
- Contributions are not subject to federal income tax.
- Investments inside the account are not taxed.
- If used for qualified medical expenses distributions are tax-free.
Does it get any better than this? It does. There are no income restrictions for this type of account. So, you can make $700,000 a year and still contribute.
As per the IRS definition, a Health Savings Account is a “tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.”
A downside is you must be covered or enrolled under a high deductible health plan. For 2016 the minimum annual deductible for a self-only coverage is $1,300 and $2,600 for family coverage. The maximum annual deductible and other out-of-pocket expenses amount for self-only is $6,550 and $13,100 for family coverage.
Contributions limits for 2016 are $3,350 for self-only and $6,750 for a family.
Investment options are similar to what you’ll find inside your 401(k) but exact options will depend on the HSA provider.
If you receive distributions for other than qualified medical expenses the amount will be subject to income tax and may be subject to an additional 20% tax.
Just like an IRA, you must choose a beneficiary when opening an HSA. Who you choose determines how it will be taxed when you die. If it’s your spouse that’s the beneficiary, the HSA will be treated as your spouse’s HSA. If it is not a spouse the account stops being an HSA and the fair market value of the HSA becomes taxable the year you die.
As per the IRS, there is no additional tax on distributions made after your disabled, reach age 65, or die (depends on the beneficiary). Hence the term “Stealth IRA”. It can be used to complement other retirement accounts and distribution strategies or pay out of pocket medical expenses.
Workplace Retirement Accounts (401k)
It is a very common scenario to assist someone who is not taking full advantage of their workplace retirement account. One of the various benefits is that contributions are made before tax. In other words, it will lower your taxable income.
For example, let say your salary is $150,000 and you contribute the current maximum amount which is $18,000 a year into your 401(k).
Instead of paying taxes on the full $150,000, your 401(k) contributions ($18,000) decreased your taxable income to $132,000. This is just a simple example to show you how contributions are subtracted from your yearly salary. Obviously, your situation will be very different.
In addition to this benefit, contributions grow tax deferred and the sooner you start saving the better. I’m not even going to get into how doctors are able to shield some of their wealth inside these accounts from law suits. Obviously, this is a complicated matter and will depend on federal and state laws, included the specifics of your situation. If you think you are at risk, consider consulting a qualified attorney.
What are you waiting for? A comprehensive financial plan will help you protect and create wealth. Let us know if we can help!