Article courtesy of Joseph Q Manley, sponsor of the MOCMS newsletter.
If you have a health savings account, follow these steps to help maximize your tax savings.
(1) FUND THE MAX. Even if you don’t have health expenses in the current year, most physicians will save a lot on taxes by fully funding their HSA.1 Why? An HSA is the most tax-favored vehicle available. It is the only account type that is totally tax-free: tax- deductible contributions, tax-free growth, tax-free qualified distributions. Importantly, balances roll over from year to year, and they can be used retroactively! Therefore, you are highly likely to use it up eventually.2 Moreover, unused funds may be passed with all tax benefits to a surviving spouse, and funds can be distributed without penalty for NON- medical purposes after age 65! So save up!
(2a) IF YOU CAN INVEST YOUR HSA, DELAY DISTRIBUTIONS. Many HSAs allow you to invest part of your account. For example, the HSA for IU Health employees allows you to invest amounts over $2,000.
If you can invest, you have a great strategic opportunity: you should delay reimbursing yourself from your HSA for as long as you can afford to.3 Why? Delaying allows you to earn maximum growth tax-free. The benefit adds up exponentially, so delay for decades if
possible. Be sure to save the receipts: you are responsible for maintaining proof that HSA distributions are qualified. Keep the records in a secure location, such as an online “cloud” storage service.
The earliest you should plan to distribute HSA funds is in retirement, if it would decrease taxable IRA distributions in a year you are in a particularly high tax bracket. Otherwise, plan to distribute the funds at death: leave clear instructions and records/receipts for your executor and/or pass the account to a surviving spouse via beneficiary designation to continue the tax benefits.
(2b) If you can’t or don’t invest HSA amounts, go ahead and reimburse yourself right away. There is little advantage in delaying if you are not investing.
(3) A NOTE REGARDING BENEFICIARY DESIGNATIONS. If your spouse is the beneficiary of your account, the tax benefits continue. Otherwise, the entire account (after qualified distributions) is taxable as ordinary income to the beneficiary.
CONTACT YOUR TAX OR LEGAL ADVISOR FOR ADDITIONAL IMPORTANT DETAILS BEFORE IMPLEMENTING THIS PLAN.
1 Disclaimer: this is general information only. You may have higher priorities or special circumstances. Talk to your financial advisor.
2 HSAs may be used for a wide range of health-related costs beyond typical health costs, such as nursing home expenses, hearing aids, dental costs, and so on. See https://www. optumbank.com/all-products/medical-expenses.html
3 Delayed distributions are permitted. See 2004 Internal Revenue Bulletin, page Q-39 on page 203. https://www.irs.gov/pub/irs-irbs/irb04-33.pdf.Joseph is a fiduciary, fee-only financial adviser with Hurlow Wealth Management Group, Inc. He is married to MOCMS member Dr. Rachel Manley, Ob/Gyn. He can be reached at [email protected] or 317.352.1658.
