The end of the year is a good time to take a look at ways to reduce your tax liability for the year. One of the easiest ways to reduce your taxable income is to make sure that you are fully funding your tax-advantaged retirement and healthcare plans. The obvious plans are the 401K, IRA, Flex Spending Accounts (FSA) and Health Savings Accounts (HSA).
While all of these plans have the advantage of lowering your gross income, the HSA has a lot of additional benefits that the other plans do not have.
Eligibility requirements to open and contribute to an HSA
- Must be at least 18 years old
- Must be covered under a qualified high-deductible health plan (HDHP)
- For 2020, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,900 for an individual or $13,800 for a family.
- Must NOT be enrolled in Medicare
- May not be claimed as a dependent on another person’s tax return
- There are no income limits to be eligible to contribute to a HSA
Contributions to an HSA
- For 2020, the contribution limit to an HSA is $3,550 for an individual and $7,100 for a family
- Ability to add $1,000 in “catch-up” if over 55 years old
- Employers and other family members can contribute to your HSA
- Money left in an HSA can be rolled over year-to-year
Qualified expenses for HSA
- The list of qualified expenses is very broad including co-payments, dental work, orthodontia, eyeglasses/contact lenses and prescriptions
- Click HERE for a list of eligible expenses
Distributions and taxes
- Distributions are not taxed if they are used for qualified medical expenses (QME)
- QME can be paid for directly through a debit card or reimbursed
- There is no age where a required minimum distribution needs to be taken
- If distributions are used for non-qualified expenses then the ordinary income tax rate applies. There is a 20% penalty on distributions for non-qualified expenses if you are under 65 years old.
- If older than 65 distributions used for non-qualified medical expenses will NOT have a penalty but will be subject to ordinary income tax
It is estimated that the average couple will need about $300,000 in today’s dollars for medical expenses in retirement. The health savings account is a great way to put money away tax-free for what will likely be highest expense that people will have in retirement.
At Chatham Wealth Management, along with financial planning and wealth management, we advise clients on all aspects of tax-advantaged retirement and health plans. Visit us at www.chathamwealth.com or contact us for a free portfolio review including your retirement plans.
The Link LonkDecember 20, 2020 at 09:23AM
https://www.tapinto.net/towns/chatham/sections/business-and-finance/articles/advice-from-chatham-wealth-management-don-t-forget-to-fund-your-hsa
Advice from Chatham Wealth Management: Don't Forget to Fund Your HSA - TAPinto.net
https://news.google.com/search?q=forget&hl=en-US&gl=US&ceid=US:en
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