How to lower your premium and increase your income tax savings!
HSA’s = Medical IRA’s
A Very Cool Way to Save A Lot of Money on Health Insurance Premiums
A Health Savings Account is very advantageous to the person who hates sending good hard ca$h to the health insurance company every month, and getting no benefit from it. If you have an IRA, then you know how it works. Its tax deferred savings for retirement. Some self directed IRA’s allow you to borrow the money and purchase asset growing investments such as real estate, metal, notes, in order to maximize the future value of your IRA.
Well, good news. In 2004, Congress got together and decided, hey let’s offer the average Joe a way to contain healthcare costs AND save for their future needs. And TA DA! The HSA was born. It’s also referred to as a medical IRA. A self directed HSA allows you to utilize the funds just like any other self directed IRA, but with a significant advantage; any qualifying medical expenses are taken out now income tax and penalty free. Huh? That’s right! Other than the premiums you pay for your health insurance, most of what you are paying out of pocket for medical expenses, like copays, deductibles, prescriptions, and medical equipment can be paid from the HSA and in turn it is income tax free to you!
Now what exactly does this mean? And hey, what’s the catch? If the government set this thing up there’s got to be some requirements and limitations; of course, but there are benefits to these rules as well. You must have a High Deductible Health Plan. That’s a deductible (your piece of the bill you are responsible for before the health insurance has to pay, not the copay) of at least $1200 or higher per plan year for an individual. For a family, the deductible must be equal to or higher than $2400 per plan year. So let’s put this in context.
I recently helped 2 individuals; each had a plan with a $500 deductible. They were paying almost $600 a month for this privilege. They thought that if they had a low deductible that they were saving money, a very common misconception. The fact is, the health insurance company is going to get its money one way or the other: either a high premium every month to enjoy a low deductible, or a low premium to get a high deductible.
So the question is; Do you want to give the money to them now or when you need services? So let’s look at this a little closer, and do some math, shall we? $600 a month x 12 months = $7200 a year. (I call this outrageous). So if they never use it, it’s a huge out of pocket, after tax, cost. Yes, after tax. In order for you to legitimately deduct this from your income taxes as a medical expense, the federal government says the cost of your medical expenses has to be more than 7.5% of your taxable gross. That’s gross. Most of us can’t deduct it, so we pay taxes on it too. This means we have to earn, in an average tax bracket of 25%, we need 25% more to clear $7200 to send to the health insurance company. This is approximately $9000 of earnings. Add the $500 deductible and the after tax cost, which then equals $625, a total out of pocket preliminary annual cost of approximately $9625. Now that’s just really gross. And every copay and prescription, etc is also after tax out of pocket, and some have a sales tax on top of it. No bang for the buck there. BUT, using an HSA and changing to a high deductible like $2000, the premium drops almost $300 a month, an after tax savings of nearly $4800 in earnings. That’s half the cost of the low deductible plan! But wait! There’s more! The $2000 health insurance deductible is coming out of the HSA as income tax deductible, tax free money AND you got service with that $2000! That’s like a coupon, earning $2500 and actually getting to use every dollar of it. AND, every dollar you spend on co-pays, prescription and a multitude of medical expenses, even vitamins, can be paid with HSA, income tax free money.
But what if I don’t use the money I set aside in the account? Oh there’s more, much more…It rolls over! For 2011, an individual can contribute up to $3050 tax free dollars; a family can contribute up to $6150 tax free dollars which is taken off your total taxable base. So if you make $50,000 as a family, you start your taxable base, before business expenses, at $43,850. After a few years the contributions can add up and you can use it at any time for investments. Other than medical expenses, the HSA follows the same IRA rules: tax deferred, penalty if withdrawn prior to age 65, IRA will own whatever it invests in and that profit percentage must therefore be returned to its owner, ie the IRA until you turn 65. And yes, it also has a beneficiary feature so you can feel good about how it’s distributed at the time your heirs pull the plug.
Wow, I think the government came up with a good idea, finally. They are rare, so take advantage of this opportunity. Call Your Insurance Chick today to get the pieces put together for you! It’s always a good time to save money on insurance,
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