Are you self-employed? The United States is home to 14.4 million self-employed individuals just like you.1 Unless they have access to health insurance through a spouse or are eligible to stay on your parent’s plan, you must pay entirely for your own healthcare coverage.
If you are relatively healthy and have few medical needs in an average year, a high deductible health insurance plan paired with a health savings account (HSA) can be a smart option. This typically means lower monthly premiums and a place to set aside funds for a proverbial rainy day.
Want to learn more about health insurance plans? Call 877-275-0485.
However, HSAs are more than just a way to save for future healthcare expenses. They offer many tax advantages and other benefits that can make them particularly appealing to the self-employed.
1. There are no contribution minimums.
When you set up an HSA, you do not have to commit to a certain contribution amount or frequency—great news for those with incomes that vary. Better yet, there is no minimum annual contribution.
However, there is an annual contribution limit set by the IRS each year. In 2015, the limits are2:
- Individual-only coverage: $3,350
- Family coverage: $6,650
You can make uneven deposits throughout the year. You can make one deposit. You can elect not to make a deposit at all.
2. Friends and family can contribute to your HSA.
If someone wants to give the gift of helping you pay for medical care, they can. Your HSA may be yours, but friends and relatives can deposit funds into it anytime.
3. HSA contributions are tax deductible.
When you are self-employed, you often want all the deductions you can get. An HSA gives you an opportunity to take another one. You can claim a tax deduction for contributions you or others make to your HSA, with the exception of an employer.3 Others cannot claim a tax deduction for their contributions to your HSA.
4. Interest gained is tax-free.
Unused funds sitting in an HSA earn interest, and the interest that accrues is tax free. That interest will compound over time and when you have an unexpected or major healthcare expense, you can withdraw the funds to help pay those medical bills. Yet another reason to hit your annual contribution limit each year and save, save, save.
5. Funds used for qualified medical expenses are not taxed.
You can use HSA funds to pay for healthcare, tax free. HSA distributions made for medical and dental items and services that qualify for the medical and dental expenses deduction are not taxed.
According to the IRS, qualified medical expenses may be incurred by:
- You and your spouse
- All dependents you claim on your tax return
- Any person you could have claimed as a dependent on your return except that:
- The person filed a joint return
- The person had a gross income of $3,900 or more
- You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s return
IRS Publication 502, Medical and Dental Expenses provides information on what items and services qualify for the medical and dental expenses deduction.
6. HSA accounts are portable.
If you cease to be self-employed, you can keep your HSA. You can also keep it if you change jobs, stop working or switch to health insurance coverage that is not an HDHP.
The rule with an HSA is that you can use it as long as it has funds, but you may only contribute to it when it is paired with a high deductible health plan.
High deductible health plans, as defined by the IRS for calendar year 2015, have an annual deductible no less than:
- $1,300 for self-only coverage; out-of-pocket expenses cannot exceed $6,450
- $2,600 for family coverage; out-of-pocket expenses cannot exceed $12,900
Out-of-pocket expenses may include deductible, copayments, coinsurance and other amounts; they do not include premiums.
7. Account dollars roll-over year after year.
The phrase “use it or lose it” does not apply to HSAs. You do not have to scramble at year’s end to find ways to use what you’ve set aside. An HSA is about savings. Again, interest will accrue on unused funds. It is to your advantage to let account dollars roll over. Ride it out through your healthy years and draw from it when the medical bills hit.
8. An HSA can be used in retirement.
When you reach age 65 and enroll in Medicare, you can no longer contribute to your HSA. You may, however, continue using funds for qualified medical expenses. As a matter of fact, once you reach age 65, you can use your HSA however you wish; however, keep in mind it that funds used for anything other than qualified medical expenses will be taxed as income.
If you withdraw funds for anything other than qualified medical expenses before age 65 you will face a 20 percent penalty, plus taxes.
8. HSA funds can be invested.
Depending no which HSA administrator you select, you may have options to invest HSA funds once your account reaches a minimum balance. This is another advantage to setting aside money in an HSA, especially when you are self-employed and entirely responsible for your own healthcare expenses and retirement savings. If you have few medical expenses in a given year and do not expect to rely heavily on HSA funds, it might be wise to select an HSA with investment options.
As with health insurance plans, not all health savings accounts are the same. Check with your financial institution to see what it offers and shop around to see what other options are available to you. If you need help deciding on a health insurance plan that’s a great fit for your lifestyle, call 877-275-0485.
1 U.S. Bureau of Labor Statistics. Economic News Release. Table A-9. Selected Employment Indicators. Last modified Feb. 6, 2015. http://www.bls.gov/news.release/empsit.t09.htm.
2 Internal Revenue Service. 26 CFR 601.602: Tax forms and instructions. http://www.irs.gov/pub/irs-drop/rp-14-30.pdf.
3 Internal Revenue Service. IRS Publication 969. http://www.irs.gov/publications/p969/ar02.html.