I’m newly self-employed. Should I open a health savings account?

Because health care costs so much, and more every year, you should know about tax-smart health savings accounts (HSAs), especially if you’ve recently become self-employed. Here is the story.

If you are self-employed, opening an HSA means taking more responsibility for your own health care costs rather than relying on the government. The good news: HSAs offer some nice tax benefits, which are explained in this column.

According to a recent report by Devenir (HSA Investment Provider), HSA’s assets grew to about $ 98 billion on 12/31/21, on about 32 million accounts. This represented a year-on-year increase of 19% for assets and 8% for accounts. Becoming projects that by the end of 2024 there will be about 38 million HSAs with assets close to $ 150 billion.

In 2010, the Employee Benefit Research Institute reported that there were 5.7 million HSAs with account balances totaling $ 7.7 billion. Wow! Obviously, HSAs are gaining ground at a rapid pace.

Health Savings Account (HSA) Basics

Under the Affordable Care Act (also called Obamacare), health insurance plans are classified as bronze, silver, gold, or platinum. Bronze plans have the highest deductibles and the least generous coverage and are therefore the most affordable. Platinum plans do not have deductibles and cover much more, but they are also much more expensive. In many cases, the ACA led to large premium increases even for those who prefer less generous plans. However, having a not-so-generous plan can make you eligible to open up and contribute to an HSA with the resulting tax benefits.

For fiscal year 2022, you can make a deductible HSA contribution of up to $ 3,650 if you have exclusive coverage for yourself or up to $ 7,300 if you have eligible family coverage (anything other than coverage exclusive).

By 2023, the maximum contributions will be $ 3,850 and $ 7,750, respectively. If you are 55 or older at the end of the year, the maximum contribution increases by $ 1,000.

You must have a high deductible health insurance policy and there is no other general health coverage to be eligible for the HSA contribution privilege. For 2022, a high deductible policy is defined as one with a deductible of at least $ 1,400 for self-coverage or $ 2,800 for family coverage. By 2023, the minimum deductibles will be $ 1,500 and $ 3,000, respectively.

By 2022, eligible policies can have a maximum pocket amount of up to $ 7,050 for self-coverage or $ 14,100 for family coverage. By 2023, pocket highs will be $ 7,500 and $ 15,000, respectively.

Key point: For HSA eligibility, health insurance premiums do not count as out-of-pocket medical expenses.

Tax treatment of HSA contributions

If you are eligible to make an HSA contribution for the fiscal year in question, the deadline is April 15 of the following year (adjusted for weekends and holidays) to open an account and make a deductible contribution for in the previous year. So there is still a long way to go before an eligible person opens an account and makes a deductible contribution for 2022, because the deadline is 4/23/23.

Cancellation of HSA contributions is a deduction above the line. This means that you can withdraw the cancellation even if you do not provide details. The best news is that the HSA contribution privilege is not lost just because you have a high income. If you are covered by qualified medical insurance with deductible discharge, you can make contributions and collect the resulting tax savings. Even self-employed billionaires can contribute if they have high deductible health insurance coverage and meet the other eligibility requirements set out below.

Key point: Sole proprietors, partners, LLC members, and shareholder employees of S corporations may claim separate over-the-line deductions for 100% of their health insurance premiums, including premiums for coverage. high deductible that allows you to receive HSA contributions.

Example 1: You and your spouse are a joint statement partner. You are both self-employed and each has individual HSA-compliant individual health insurance policies for the entire 2022. Both policies have $ 2,000 deductibles. For fiscal year 2022, you and your spouse can each contribute $ 3,650 to their respective HSAs and therefore claim a total of $ 7,300 in cancellations to save taxes on your Form 1040 2022 set. you are in the 24% federal income tax group. , this strategy reduces your 2022 tax bill by $ 1,752 (24% x $ 7,300). If you do this exercise for 10 years, you will save $ 17,520 in federal income tax, assuming you contribute $ 7,300 each year and will remain at 24%. You may also be entitled to state income tax savings. In addition, you will have everything accumulated in your HSA balances.

Example 2: Throughout 2023, you will have qualified family health insurance coverage with a $ 4,000 deductible. You will be 55 years old as of 12/31/23, so you can contribute up to $ 8,750 to an HSA for fiscal year 2023 – the “normal” limitation of an additional $ 7,750 + $ 1,000 due to your age .

Tax treatment of HSA distributions

HSA distributions that are used to pay for qualified medical expenses of the landlord, spouse, or HSA dependents are exempt from federal income taxes. However, you can create a balance in your account if your contributions plus income exceed withdrawals for medical expenses. All earnings are tax-free. Therefore, if you are in very good health and make minimal or no distributions, you can use an HSA to create a substantial medical expenses reserve fund over the years while earning tax-free revenue along the way.

If you still have an HSA balance after you reach Medicare eligibility age (usually 65), you can run out of account for any reason without a tax penalty. If you do not use the withdrawal to cover qualified medical expenses, you will be required to pay federal income tax (and perhaps state income tax), but the 20% tax penalty that generally applies to withdrawals does not apply. used for medical expenses will not apply. There are no tax penalties for withdrawals after a disability or death.

Alternatively, you can use your HSA balance to pay for uninsured medical expenses incurred after you reach Medicare eligibility age. If your HSA still has a balance when you leave this cruel orb, your surviving spouse can take over the tax-free account and treat it as your own HSA, as long as your surviving spouse is the beneficiary. of the account. In other cases, the balance of the date of death of the HSA must be included, in general, in the taxable income on that date by the person who inherits the account.

Notice: HSA funds cannot be used to make tax-free reimbursements for medical expenses that occurred prior to account opening.

HSA investment options and vendors

In some important respects, HSAs are similar to IRAs. They both have the same contribution terms, they both need an account keeper or a trustee, and they can both offer theoretically the same investment options (stocks, mutual funds, bonds, CDs, etc.). That said, some HSA managers may limit your investment options to very conservative options, which isn’t necessarily a bad thing.

You can find an HSA administrator with an internet search. Some health insurance companies and brokerage firms have pre-arranged agreements with HSA administrators. For example, Vanguard customers can transfer funds to HSAs managed by a provider partner called HealthEquity.

The bottom line

An HSA can work a lot like an IRA if you can maintain good health and avoid large medical bills. Even if you have to exhaust your account each year to pay for uninsured health care costs, the HSA agreement allows you to make deductible annual contributions and pay for uninsured expenses in dollars before taxes. These tax benefits can add up to substantial money over the years. So if you are eligible for an HSA, starting one and making deductible annual contributions is a no-brainer, in my humble opinion.

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