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Financial Planning / Tax Strategies


Subject:  Re: Work Offering HSA Date:  10/17/2012  6:14 PM
Author:  MakingTrax Number:  116808 of 123001

Inparadise -

I’ll weigh in with my experience.

I’ve had my high deductible/HSA for about 5 years. I’ve been fortunate in that: 1) we’re relatively healthy and have only minor medical expenses; 2) we’ve been able to contribute substantially to the HSA (up to the maximum most years); and 3) we’ve been able to pay medical expenses (so far) out of pocket without needing to tap the HSA funds.

As jeffbrig points out, the biggest financial risk is during those early years while you are trying to build up a large enough pot of cash to cover your annual medical insurance deductible. But keep in mind that if you have the funds on hand, you can fully fund your HSA all at one time at the beginning of the year (or upon establishing the account); you don’t have to stretch out the funding on a monthly basis.

From a tax planning perspective, the HSA contribution is deductible as a gross income adjustment (probably only for your personal contributions, not employer contributions). FYI, 2012 contribution cap is $3,100 (for individual or $6,250 for family) with an additional catch-up allowed at age 55. As intended, funds can be withdrawn to reimburse (or pay for) qualified medical expenses and those funds are not subject to any federal tax or penalty. If you become unemployed, the HSA funds may be used to pay your medical insurance premiums (without any early withdraw penalty).

The HSA functions somewhat similar to an IRA. Interest/dividends/cap gains earned by the account grow tax deferred in the account. Also, you could incur “early withdraw” penalties for non-qualified withdraws. However, at age 65 you may withdraw the funds for any purpose without penalty (not sure if you need to pay federal tax if used for non medical expenses or not, I expect so…maybe someone else can answer that).

My personal financial goal is to take advantage of the annual tax deduction through HSA contributions for now and let the fund stockpile to cover future medical expenses once I’m on medicare (if it still exists at that point). Otherwise, I view it as a supplement