Everyone loves tax-advantaged accounts, but what if we told you that there’s an account that offers three different ways in which you can save tax dollars? The good news is that not only does such an account exist, but Lockheed Martin employees have access to it. This “super tax-advantaged” account is the Health Savings Account and is available in coordination with a high deductible health insurance plan through Lockheed. An HSA can not only be used to pay for medical expenses but is also a great investment tool for future retirement expenses. Let’s take a look at some of the benefits that an HSA provides:
- Exclusion from earned income: Any contributions that are made to your Lockheed HSA won’t count as earned income. This means that your contribution is non-taxable when contributed. In order to stay non-taxable, your HSA dollars must be spent on Qualified Medical Expenses. So, let’s say you are in the 22% tax bracket and you contribute $3,000. This means that you would save $660 dollars in income taxes in that year. Wow!
- Exclusion from FICA taxes: Not only do you not pay income tax, but you also don’t pay Federal Insurance Contribution Act (FICA) taxes for Medicare and Social Security. These are currently 7.65% of your pay. So, back to our example of a contribution of $3000 above, you would save an additional $230 in FICA taxes. This would bring your grand total to $890 in total tax savings. That is a $29.65% savings in one year. What a deal!
- Tax-free growth: Earnings accumulated in an HSA won’t incur any taxation if they are used for qualified medical expenses. And, these dollars can be invested into mutual funds for long-term growth. So, for example, if your account began with $1,000 and over time grew to $2,000, you would not owe taxes on the $1,000 growth in the account. Incredible!
- Your money: When you contribute to an HSA, this is your money and is not subject to being lost at the end of the year like the Flexible Spending Account. And, once you retire, you and transfer it to another HSA account of your choosing. No more worrying about having to spend the money by year-end. Woohoo!
- Another neat benefit of the HSA is that after age 65, the funds can be used to pay for other expenses. However, HSA dollars spent on anything other than qualified medical expenses will be taxed as ordinary income once withdrawn.
- HSAs do have contribution limits, an age limit, and other rules worth noting. For a comprehensive guide to HSAs, click here. If you are already enrolled in a high-deductible health plan, the addition of a Health Savings Account may be a great way for you to fund medical expenses and save on taxes. If you aren’t currently participating in a high-deductible plan, consider both the pros and cons before making the switch. Happy saving!
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