Two Little-Known but Legal Loopholes the Government Won’t Talk About
Despite all the public debate over healthcare, sadly, few take advantage of two government programs that help regular people pay their medical expenses.
Employed and self-employed people have several ways to save money for medical expenses – while also lowering their tax bills.
The government is trying to help you here, so let them.
If You’re Under 65, You Can Build Long-Term Wealth While Investing to Pay Your Future Healthcare Expenses
Start and contribute to a Health Savings Account (HSA).
Some employers offer them, or you can open your own at various financial institutions.
The money you contribute to an HSA is tax-free, and so is the money the HSA earns – just like a standard IRA or 401k.
Unlike a standard IRA or 401k, though, the money remains tax-free when you withdraw it, as long as you spend it on qualified medical expenses.
Also, you can withdraw it any time you have medical bills to pay – whether that’s next month or 50 years from now.
Therefore, in many respects, an HSA is better than the usual retirement accounts.
HSA Eligibility Requirements and Advantages
The catch is, you cannot be in a low-deductible health insurance plan or eligible for Medicare.
But you can invest your HSA money, so it grows into a large account over the decades.
And, yes, your HSA is good for decades. Even when you’re not eligible to make additional contributions (because you have low-deductible insurance, say, or you’re not working, or you go on Medicare), you can let your investments in the HSA stay there to grow in value.
At age 65, you can withdraw money from it for any reason with no penalty, just like a standard IRA or 401k. However, if you don’t spend the funds for medical expenses, you will owe taxes on the withdrawals, just like a standard IRA or 401k.
It’s worth remembering; therefore, your risk of having medical problems goes up as you age. Unless you absolutely need to withdraw money for a nonmedical emergency, it’s safer to keep the funds in the HSA to pay for medical expenses you may face in your 70’s, 80’s or 90’s. Medicare doesn’t cover everything now, and who knows how much coverage might be cut in the future?
Fidelity estimated a couple retiring at age 65 would spend an average of $280,000 for medical expenses during the remainder of their lives. That’s out of their own pockets – despite their insurance and Medicare. Unless you’re certain you’ll have that $280,000 lying around somewhere else, an HSA is your best bet.
If you withdraw money from an HSA before you’re 65, however, and spend it on something besides a medical expense, you’ll owe a 20% penalty. Don’t do that.
How a Health Insurance Plan Qualifies
The definition of high deductible medical insurance changes every year. In 2019, your health insurance’s deductible is considered high if it’s $1,350 or over for yourself or $2,700 or over for your family.
If your deductible is under those amounts, you’re not eligible for an HSA.
Your health plan must also have an out-of-pocket threshold below certain limits. For yourself only, in 2019, that limit is $6,750. For yourself and your family, it’s $13,500. If your plan’s out-of-pocket limit is above those amounts, you don’t qualify for an HSA.
HSA qualified medical expenses include just about all mainstream medical services. That includes long term care, dental, eye exams and glasses, nursing care, hearing aids, and even chiropractic services.
Your Contributions to an HSA
The contributions you’re allowed to make to an HSA change every year. In 2019, the limit is $3,500 for yourself only. It’s $7,000 for your family. You have until the April tax deadline of the following year to deposit the money. (That is, to make a contribution for 2019 you have until April 15, 2020.)
If you’re 55 or older, you can contribute an additional $1,000 annually to “catch up.” That makes the age 55 and over limits $4,500 and $8,000.
If your employer makes contributions to your HSA, that counts toward your annual limit.
Unlike IRAs, there are no maximum earnings requirements. Everybody with enough earned income can contribute to an HSA as long as your health insurance qualifies.
And there are no required minimum distributions to worry about once you reach age 70 1/2. You really can keep money in the account for 50 – or more – years until you incur the medical expenses.
If your employer offers an HSA, that’s probably your best bet. If they don’t, two providers to check out are Lively and HSABank.
If You’re Under 65 and Now Have Fairly Predictable Healthcare Expenses
If you expect to have medical expenses within this calendar year, check whether your employer offers a Flexible Spending Account (FSA).
An FSA allows you to set aside money on a tax-free basis for prescription drugs, copayments, deductibles, and other out-of-pocket healthcare costs. Those include care for dependents.
In 2019, the contribution limit is $2,700 for yourself and $5,000 for dependent care. The limit for your own contribution goes up every year with inflation, so it will be slightly higher in 2020.
The dependent care contribution gets complicated because it applies only if your spouse is employed or self-employed. And if they make under $5,000 for the year, the limit is only what they make. And if they’re covered by an FSA with their employer, definitely consult your HR experts.
The one big catch with an FSA is the money must be spent in the same calendar year – or it’s gone for good. That’s why an FSA is not the best option for people who don’t need or plan to go to the doctor this year.
Some employers have provisions to carry the money over an extra 2 1/2 months or allow a $500 carry-over.
If your employer’s plan allows the $500 carry-over, it’s a good idea to contribute that, because you never know when you may incur some unforeseen medical expenses.
If you qualify for an FSA or HSA – take advantage.
If you don’t qualify for an HSA this year, it’s probably worth changing your health insurance plan for – unless you are already spending a lot of money on medical bills and, therefore, really need that low deductible.
If you can’t contribute the maximum to both an HSA and a standard retirement account, fund the HSA first.
Your HSA is that important.
