Health Insurance

Often, people can choose between using a high-deductible health plan (HDHP) or an alternative option. Obviously, the coverage that best suits your needs should be a top priority in choosing whether you should have an high-deductible plan. However, if it’s a close decision or either option could feasibly suit your situation, then you should consider opting for the high-deductible insurance, so you can also fund a health savings account (HSA).

One perk of an HSA is the ability to contribute to the account on a pre-tax basis, which means you can receive an income-tax deduction for your contributions. If possible, you should contribute to the HSA via payroll contributions so you can also avoid Federal Insurance Contributions Act (FICA) taxes, meaning for Social Security and Medicare.

You’re able to take tax-free withdrawals from your HSA if you need them to cover qualified medical expenses. And though you cannot report HSA-funded medical expenses as itemized deductions on Schedule A of your individual tax return, you will still receive a tax deduction on those dollars when you contribute them to the HSA.

If you’re a high-income earner, you usually have a large adjusted gross income limitation on itemized medical deductions that otherwise prevent those expenses from actually being deductible, so using an HSA can help. However, it’s typically recommended that high-income earners fund their HSAs to the maximum each year instead, letting the account grow while they pay medical bills out of pocket.

In addition to tax-deductible contributions, HSAs also grow tax-deferred, and many custodians will allow you to invest your account balance in mutual funds. It’s almost like a deductible traditional IRA, which many high-income earners can’t utilize due to adjusted growth income limitations. In the future, those HSA balances can be withdrawn tax-free if they’re used for qualified medical expenses (e.g., insurance premiums for those who retire before being on Medicare) or as taxable income (but without any penalty if withdrawn after age 65) for non-medical spending.

This means you can potentially reap the best of all options — tax-deductible contributions, tax-deferred growth and tax-free distributions — if you use HSA balances for qualified medical expenses, and otherwise benefit from a quasi-pre-tax retirement account if you withdraw the balances after age 65.

The bottom line

You’ve invested years of hard work, time and effort into building the life and career you have today. Putting the appropriate coverage in place now will help you rest easy knowing that your loved ones and hard-earned assets are protected against the unexpected.

As your needs become more specialized and as your financial situation evolves, it will become even more important for you to involve a professional or team of professionals, who can help you address the available options and make sure your coverage continues to protect you and your family.


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Posted 2:00 PM

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