Here’s one health-insurance choice that can save you money now and make you even more later:
This article was first published in May and has been updated with new HSA contribution limits for 2020 and other numbers.
A flexible spending account, or FSA, is offered through your employer’s health insurance and allows you to set aside up to $2,700 in pretax money . That money must to be used for eligible out-of-pocket health-care expenses for you and your family that tax year or it is lost, except for $500 that the IRS lets you carry over to the next year. So the FSA can be useful if you have a good idea how high your out-of-pocket expenses will be, and if you don’t contribute too much.
More advantages An opportunity to increase tax-deferred savings may be especially important if you are self-employed or if no employer-sponsored retirement account is available to you. Federal law allows a person with a 401 or similar employer-sponsored retirement account to put away up to $19,000 in pretax dollars each year. But the limit for individual retirement account contributions is only $6,000, plus another $1,000 if you are 50 or older.
Here’s how you avoid taxes when you take out the money Once you are 65, you can withdraw money from your HSA for any purpose, rather than just to cover health costs. If you spend it on qualified health-related expenses, the withdrawal is tax-free, as it is at any age. If you take money out for another reason, you will have to pay income taxes.
The higher deductibles and higher potential out-of-pocket maximum figures may be a little scary. However, this is where a potential opportunity lies.
Ken Roberts, an investment adviser with IWC Asset Management in Carmel, Calif., said that some people are reluctant to consider an HSA because they take a very simple approach: They want the lower deductible. “What you find in the low premium plan is that the savings you accrue on the premium tend to fully cover your out-of-pocket risk,” he said. This is, of course, more likely if your employer matches some of your HSA contribution.
“On the most elementary level, just like with your 401, if you are going to participate, before you do, take a look at what the expenses are. A particular HSA may be so expensive that it is not worth doing,” Mendels said. But the default choice means many participants will never change the investment selections for their HSAs. This can lead to a tremendous loss of potential investment returns over the years, or decades. A phone call to your plan administrator to discuss your investment options, and their costs, is time well spent.
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