Tax

3 things keeping you from maximizing this tax-favored account

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Investing a pot of tax-free cash for medical expenses is a great idea, with apparently few takers.

Health savings accounts, which are offered alongside high-deductible health-care plans, come with a bevy of tax benefits.

You can contribute to an HSA on a pretax or tax-deductible basis and have your savings grow free of taxes over time. You can also take tax-free distributions to cover qualified medical expenses.

Another sweetener: Pretax contributions you make to your HSA, as well as contributions your employer makes to the account, avoid Social Security and Medicare taxes.

As attractive as these features may be, few people are maximizing their options, according to data from the Employee Benefit Research Institute.

For example, only 6% of HSA holders had their money invested in something other than cash in 2018, EBRI found. The organization studied 9.8 million accounts, covering $22.8 billion in assets.

Further, while end-of-year balances were up on average, they remained low. The average balance was $2,803 in 2018, up from $1,990 in 2011, according to EBRI.

“Most people who have these accounts haven’t had them for long,” said Paul Fronstin, author of the report and director of the health research and education program at EBRI.

Here are three reasons why your HSA may be falling short of its potential.

1. Low contributions

Generally, people who have had an HSA for longer tend to make bigger contributions and hold larger balances, EBRI found.

In 2018, individual contributions averaged around $1,166 for accounts open for one year,  compared to $3,355 for HSAs that have been open for 10 years, according to the data.

“There’s no doubt that there’s a cash flow issue,” said Fronstin.

This year, you can stash up to $3,550 in an HSA if you have self-only coverage. This amount increases to $7,100 under family plans. People over age 55 can put away an additional $1,000.

When it comes to figuring out how much to save in your HSA, try to at least set aside enough that you can meet your health-care plan’s annual deductible.

Additional dollars you can save, perhaps from lower insurance premiums, can be redirected toward your HSA balance, Fronstin said.

2. “An FSA mentality”

Savers who are new to HSAs may get them confused with their cousins, the health-care flexible spending account.

You can also put pretax dollars into health-care FSAs and use them tax-free for qualified medical expenses.

In 2020, you can save up to $2,750 in this account.

The big difference here is that you generally must use the FSA balance by the end of the calendar year or else you forfeit any leftover money.

HSAs, on the other hand, can grow for years at a time. There is no “use it or lose it” provision…Read more>>

Source:-cnbc