HSAs in 2021 : 5 Things to Know
Contributing to a Health Savings Account can be a great way to save on your yearly tax bill. For small business owners already burdened by high taxes, knowing the ins and outs of handling an HSA can help relieve stress when tax season comes around.
In short, if you want to save money on taxes this year (and who doesn’t?!), you’ll love these tips on making an HSA work for you.
Let’s get started!
1. HSA’s Can Help You Save On Healthcare…and Your Tax Bill
Think of an HSA as a tax-deductible savings account for medical expenses. The idea behind it is to encourage individuals to be more selective with their health spending dollars, hopefully lowering their overall healthcare expenses. The account can be used for qualifying medical expenses, such as office visits, dental work, prescriptions, chiropractic care, and even some medical devices.
Individual HSA owners can contribute up to $3,600 in 2021, while families can add up to $7,200. All contributions added throughout the year are 100% tax deductible when tax season comes around, and any funds not used at the end of the year simply roll over to the following year. And if you DO have any medical expenses, you won’t be taxed on money taken from the HSA to pay your bills.
2. HSAs Can Be Used As Retirement Accounts Too
If you don’t have many medical expenses, your HSA account balance can grow quickly. Rather than just sit on the money, you can switch your HSA to an investment account, allowing it to accrue interest. Then, after age 65, you can make withdrawals from the account, penalty free. This is true even for non-medical expenses!
3. Not Everyone is Eligible
Only individuals with high-deductible health insurance plans can open an HSA. In 2020, the IRS defined “high deductible” as any insurance plan with a minimum deductible of $1,350 for an individual, or $2,700 for a family.
So what happens if you have a high deductible plan now, but switch to different insurance down the road? You can keep the money in the account, using it for qualifying medical expenses. You just won’t be able to make any further contributions, unless you return to high-deductible insurance.
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4. HSA’s Can Be Financially Smart For Small Business Owners
If you have experience working for a larger company or corporation, you’re likely familiar with choosing your health insurance plan through an employer.
But taking the leap into owning a business often means losing access to affordable group health insurance, and self-insuring can be cost prohibitive without group policy discounts.
To offset the cost, many business owners choose to enroll in a high deductible plan, which typically has much lower monthly premiums than standard health insurance plans.
Money-savvy business owners can claim their health insurance deductibles on their taxes, AND reduce their tax burden by contributing to an HSA.
5. How to Open an HSA
It’s easy. Simply look for an HSA provider online, check with your health insurance company or bank to see if they offer HSA accounts, or talk to your tax professional!
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