There is no shortage of information on the wild costs of healthcare. We all know that healthcare, especially for the self-employed, like real estate professionals, is one of our greatest costs.
Medical care prices rose 2.2 percent in 2021, a larger increase than the 1.8-percent advance in 2020 (Source: Bureau of Labor Statistics, 2021). It’s no secret that this trend will likely increase.
So, how can we keep up with the cost of healthcare without coming out of pocket for too much?
The first step is to understand what a High Deductible Health Plan is (HDHP). A HDHP is exactly what it sounds like. It’s a health insurance plan that has a higher deductible in exchange for, typically, better coverage of medical costs after that deductible is paid by the policyowner. To qualify as a HDHP in 2022, the IRS determined deductible must be $1,400 for self-only coverage and $2,800 for family coverage.
Why does having a HDHP help you?
By having a HDHP, the IRS allows you to own a Health Savings Account (HSA) to help you pay for that higher deductible. An HSA is a savings account that can be used for the purposes of paying for qualified medical expenses for either you or your family. Even better, the IRS will give you a tax deduction for your contribution into your savings account. On top of that, they will allow you to invest all of the proceeds in that account into traditional investments like stocks and bonds. That’s right, similar to a 401(k), you can defer any potential growth that occurs inside of your HSA!
Want to hear one better??
When you go to pay for qualified medical expenses out of your HSA using your HSA debit card, all of those potential gains come out tax free! As in, no capital gains or ordinary income taxes!
That’s why the HSA is the only “triple tax-free” allowed account that exists. If you do not currently have an HDHP, I would highly recommend looking into one combined with an HSA. This is especially important for those with higher income, like seasoned real estate professionals.
How to supercharge your HSA for those with college age children:
The IRS is not going to be too generous. Yes, they allow you triple tax-free, but they are going to cap your contributions to lower amounts than, let’s say, your 401(k).
For 2022 (inflation-adjusted annually), the maximum annual contribution for self-only is $3,650, and for families it’s $7,300. If you are 55 years of age and older, they will allow an additional $1,000 annual catch-up contribution.
While this is great, it’s just a dent in the overall cost when you have older kids. I know, personally, I had quit a few hospital visits when I was older for stitches, etc. I was a very daring person who felt invincible at times…as I hope other relate too??!
The problem occurs when you can no longer claim your child as a taxable dependent. Because, at that age (typically after age 19), they are no longer allowed to use tax-free HSA dollars on your plan!
Yikes! Just when they might need it most!
Yes, they can still remain on your health insurance plan, as a full-time student, until the age of 26. But, they cannot use your HSA money.
For those with college age kids who are between the ages of 19-26 and still on your HDHP health insurance plan, can open up their own HSA and contribute $3,650 annually (2022 per child).
In this case, you would still give the money to your child to add to his/her HSA. The child would receive the tax credit, but the benefits of potential tax-deferred growth and tax-free distributions to qualified medical expenses still exist!
When you have a child that is away from home and in those older years, there are plenty of accidents that could and might occur. I don’t wish this on anyone, but it certainly helps to have some tax-free savings built up. You certainly don’t want to be caught by surprise with a large medical bill that you or your kids wouldn’t be able to afford.
There are so many strategies that can be implemented with an HSA. If there is any type of account I would recommend most to high-income earning self-employed professionals, like real estate agents, its the HSA!
I’m happy to help my clients look over and discuss good combinations of HSA strategies for their best results.
If you want to begin that process, feel free to reach out!
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