Health Savings Accounts

Health savings accounts are the best way to make money, and by that, we mean that they are the best way to save money. Thanks to their tax advantages, employers now offer excellent opportunities for investors to hedge their health costs against the cost of taxes.

How they work
Generally speaking, health savings accounts allow savers to essentially save money before it is taxed. Thus, if you are taxed in the 28% tax bracket, you could put $5000 into a health savings account and avoid paying $1400 in taxes. Where you would have $3600 of that $5000 if you were to take the money as cash, you instead have $5000 in a health savings account, which can be spent as cash to pay for every health related expense.

Health related expenses that are included are doctor’s visits, dental work, your co-payments on the two items listed, and also on pharmaceuticals and other drugs. Due to a recent change to the tax law, any and all products that you might buy over the counter can also be purchased with a health savings account as long as you have a written prescription.

Why use health savings accounts?
Health savings accounts are best used in the following scenarios:

High deductible health insurance – If you’ve high deductible health insurance, then the health savings account can be used as a method to say pre-tax dollars to pay for whatever your deductible might be. For the young professional without health insurance, deductibles rise to as high as $5000 per year. Luckily, health savings accounts offer a mechanism to save that $5000 pre-tax, thus avoiding your out of pocket tax costs.

Bridge loan for medical needs – Unfortunately, health related costs don’t always work on our schedules. However, as part of joining your employer’s health savings plan, you can use your account whenever you might need it. That means if you were to join in January for 52 weeks, you would contribute just under $100 per week to reach the account maximum of $5000. However, at any point in time, all $5000 in funds are available to savers with health savings accounts. Thus, though you will have only contributed roughly $1200 by the end of March, you would still be able to spend the full $5000. The health savings account essentially allows you a zero-interest loan on any and all medical expenses.

Combining with other tax strategies – The health savings account work excellently with other tax strategies. The Federal government allows savers to write off all health expenses past 7.5% of their adjusted gross income off their own income each year. Thus, a worker who makes $100,000 per year with $12,500 in medical expenses could write off $5000 in expenses past the $7,500 threshold. With a health savings account, this means a double savings on your tax burden, since $5,000 of the initial $7,500 is already tax free.

Protecting your quality of life
There is no better way to save for large medical expenses, or to reduce your income tax exposure than to open up a health savings account. While they are not directly insurance programs—they won’t pay for $50,000 medical bills, nor protect you from large bills—they do allow you to shield money that you plan to spend anyway against income tax.

These plans are most beneficial to those in the highest tax brackets. If you reach the 35% top bracket, each $5,000 saved through a health savings account is $1750 in income taxes you don’t have to pay, essentially allowing you to buy $6,750 in post-tax medical services just by choosing the health savings account option. But don’t think only the rich can benefit. In fact, if you pay any amount in income taxes, even at the lowest marginal rate of 10%, then you stand to save $5000 per year just by opening one up.

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