A Health Savings Account (HSA) can provide doctors an efficient way to save. The key benefit of an HSA is that it enables physicians to put away a portion of their paycheck without being taxed on that money (if used for qualified health expenses). This can be one of the most efficient ways to save, regardless of whether you’re saving for a catastrophe or the long-term future.
If you’re like many doctors, your health insurance plan has a high deductible. Perhaps it is time to rethink your HSA contributions to get the most from your money.
Income and Deductibles
Health insurance companies commonly offer HSAs, so an individual can sign up for the account when signing up for their health insurance plan. The government is incentivizing policyholders to prepare for emergencies, so there are fewer delinquent policies. If your insurance policy doesn't offer an HSA option, it's possible to open a separate account at practically any financial institution.
Reducing Your Taxable Income
Having money taken out of your income tax-free is a way to reduce the amount of taxable income you make each year. It helps you maximize your income while simultaneously safeguarding against emergency health expenses. Basically, what you contribute to your HSA is the amount that will affect your taxable income, up to a maximum contribution of $7,100 per year (for tax year 2020).
For example, if you make $350,000 per year and contribute the maximum of $7,100 to your HSA, you will be taxed as though you earned $342,900. That could save you as much as $2,500 on taxes. Even better, the money you save can be invested in a low-cost, diversified investment portfolio tax-free. So, you’ll be saving toward retirement, and, if needed, use the money to cover qualifying health costs tax-free.
If you don’t need the contributed funds for health-related expenses, you can withdraw them later as a retirement distribution. You would need to pay tax at that time, just as you would an IRA withdrawal. And, the money you contribute to your HSA will roll over from year to year, which means you can grow your emergency funds over time.
The government has placed restrictions on how much a person can contribute to their HSA based on their age and marital status, and these restrictions change every year. For individuals, the current maximum is $3,550 and $7,100 for a family. Adults over the age of 55 are allowed to contribute an extra $1,000 or more. If you choose to open an HSA, you must make contributions in cash as opposed to other types of property, including stocks or bonds. Employers and family are allowed to contribute to an HSA on behalf of the individual. The contribution limits for employers generally change every year as well.
How to Use It
Some people use their HSA as a straight savings account, while others may choose to invest the money in mutual funds or stocks. This could be a better financial move than investing in a typical retirement account. When it comes to an IRA, individuals are required to withdraw from the account once they reach the age of 72, but an HSA allows people to continue contributing to it tax-free with no such requirement. The income deposited is also not subject to the FICA tax that goes toward social security and Medicare, while an IRA would be subject to the additional tax. HSAs are also allowed to be used for non-eligible expenses, though they will be taxed as income if the individual chooses to do so.
An HSA is a great way to grow your retirement investments tax-free and have money available if needed.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.