What’s the right tax-advantaged account to fund your health care expenses?
Health care costs continue to climb. Jeffrey R. Spencer, CPA, MAcc, Ciuni & Panichi, Inc. Principal, explains some tax-friendly ways to cover your health care expenses.
Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Accounts (HRAs) all provide opportunities for tax-advantaged funding of health care expenses. But it’s important to know the difference to figure out what works best for you. Here’s an overview:
HSA
If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,350 for individual coverage and $6,750 for family coverage for 2016. Plus, if you’re age 55 or older, you may contribute an additional $1,000.
The advantage of an HSA is you own the account and it can bear interest or be invested, growing in tax-deferred dollars similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
FSA
Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,550 in 2016. The plan pays or reimburses you for qualified medical expenses, so you are paying for medical expenses with pretax dollars.
However, you need to predict your annual medical expenses because what you don’t use by the plan year’s end, you generally lose. Some plans may allow you to roll over up to $500 to the next year. Or it might give you a 2 1/2-month grace period to incur expenses to use up the previous year’s contribution.
HRA
An HRA is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.
The best advice we can offer is: “Don’t go it alone.” We’re here to help you make the right financial decisions for yourself and your employees. Please contact Jeff at 216-831-7171 or jspencer@cp-advisors.com for more information.
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