As taxes continue to rise, there are less and less places to put your hard earned dollars so it does not go to Uncle Sam. Luckily, your employer may provide you an additional avenue (aside from your retirement plan) to bypass taxes while also providing you a unique way to pay for your medical expenses now and into the future. This article will focus specifically on health savings accounts and flex spending accounts. Our goal is to give you a cursory view of these two types of accounts so you can make the proper decision in making your elections.
Flexible Spending Accounts (FSA)
A Flexible Spending Account (FSA) is an account offered by your employer where you are able to pay certain out of pocket medical expenses pretax. Thus, whatever you put into the account (up to the limit) will NOT be taxed, so long as the money is used for out of pocket medical/dental expenses.
FSAs are available only with job-based health plans, so you must be employed and the benefit must be offered in order to take advantage of it. Your employer may also make a contribution to an FSA on your behalf. There is a limit on contributions of $2,600 for individuals, and $5,200 ($2,600 each) for married couples in 2017.
Unlike a health savings plan (outlined below), if you do not use the money by the end of the plan year (which usually denotes calendar year), you lose the remaining amount in the account. Some plans do allow a grace period of up to March 15th to give you a few extra months in a given year, so check your plan. Luckily, the government has tweaked this rule to allow you to roll over $500 year over year, thus you need to make sure you spend down the account to at least $500 by the end of the plan year. Your health claim must have been incurred prior to the end of the plan year for it to be reimbursable.
Health Savings Account (HSA)
A Health Savings Account is very similar in terms of its benefits. An HSA gives you a triple tax break: Your contributions are sheltered from income taxes, the money grows tax-deferred, and the funds can be withdrawn tax-free for medical expenses. It’s like a supercharged flexible spending account that never expires, and it can even serve as an extra retirement-savings fund.
In order to qualify, you need a high-deductible health insurance policy, whether it’s through an employer or on your own. In 2017, your deductible must be at least $1,300 for individual coverage or $2,600 for family coverage.
You can make pretax contributions (or tax-deductible contributions, if you’re on your own) in 2017 of up to $3,400 a year if you have individual coverage, or up to $6,750 if you have family coverage. People age 55 and older can save an extra $1,000 per year. You can add money to the account until the tax-filing deadline for the previous year's contributions.
You may spend the HSA money tax-free on out-of-pocket medical expenses, such as your deductible, co-payments for medical care and prescription drugs, or bills not covered by insurance, such as vision and dental care. Most plans provide a debit card and an online bill-payment option.
Unlike with a flexible spending account, you don’t have to use the money by the end of the year—it can grow tax-deferred in your account for later use – thus this account can be invested and grow to a rather large pot of medical expense money in retirement (however, one note - you cannot contribute past the age of 65). There’s no deadline for making a withdrawal – you can reimburse yourself in future years for medical costs you incur now, as long as you have records of past bills. Contributor beware: if you use HSA money for nonmedical expenses, you’ll have to pay taxes on it (plus a 20% penalty before age 65).
Karen DeRose and Anthony DeRose are registered representatives of Lincoln Financial Advisors.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. DeRose Financial Planning Group is not an affiliate of Lincoln Financial Advisors.