This article was written in January 2021; contribution and distribution limits have since changed. Contact your Verde Advisor for more up to date information.
A new year brings forth a time of reflection on the previous year. In doing so, we are able to rejoice in a fresh start, create resolutions, and gaze onto the blossoming of goals and aspirations. Resolutions typically center around physical health. Now more than ever, I am reminded of the quote “The first wealth is health.”, penned by Ralph Waldo Emerson. Good health truly is essential to the prosperity of all!
As you begin to think about your new year resolutions, consider incorporating both physical and financial health. One way to start is to utilize a health savings account (HSA) to its full advantage. A health savings account offers three key tax advantages: The first being, contributions are tax-deductible, savings grow tax-free and may be invested for a potentially higher yield, and withdrawals for qualified medical expenses are also tax-free. A unique way to use these advantages is through a qualified HSA funding distribution.
A qualified HSA funding distribution may be made from your traditional individual retirement account to your health savings account (HSA). An individual may make only one qualified HSA funding distribution during their lifetime. The maximum qualified HSA funding distribution depends on the high deductible health plan (HDHP) coverage you have on the first day of the month in which you contribute, and your age as of the end of the tax year. For example, in 2021 an eligible individual, age 58, with a family HDHP coverage, may make a qualified HSA funding distribution from their traditional IRA of $8,200 ($7,200 plus $1,000 additional contribution (IRS Guidelines, 2020) ). This would allow you to convert taxable dollars from your traditional IRA into potential tax-free dollars for qualified medical expenses in your HSA.
As society progresses, people are living longer, and healthcare costs are rising at an accelerated rate, which could exceed the general cost of living. The average retirement age is 62 for most Americans, three years prior to Medicare eligibility. Health care is expected to be one of your largest expenses in retirement, consuming a larger portion of your retirement income, meaning you must plan for said expenses. Along with your physical health resolutions, if you are still working and eligible, consider contributing to an HSA account as part of your financial health resolutions.
An HSA account you set up to pay or reimburse qualified medical expenses you and or your family incur. Contributions remain in your account until you use them, and the HSA is portable, meaning it stays with you if you change employers or retire.
To qualify you must be covered under a HDHP, not on Medicare, and not dependent on someone else’s tax return. In 2021, an individual may contribute up to $3,600 (an additional $1,000 if over 50 years of age) and a family may contribute up to $7,200 (an additional $1,000 if over 50 years of age). An HSA is one of many ways to begin to strengthen your financial wellness goals ( IRS Guidelines, 2021).
IRS Guidelines. (2020, January 30). IRS. Retrieved January 4, 2021, from IRS – Health Saving Plans https://www.irs.gov/credits-deduction
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