When we hear the words “tax shelter”, many of us picture a real estate investment that purposely loses money or money filtered through a phony corporation that is nothing but a piece of paper on file in the Cayman Islands. Most of us don’t have the means or sophistication to take advantage of this dubious tax planning, nor would be able to afford a lawyer who could defend against it when the Internal Revenue Service wanted to know more about it. There is, however, an easy, perfectly legal way that most of us can shelter money from federal taxation to immediately use or allow to grow tax-free for the future.
If you or your family are under a High Deductible Health Plan, which, in addition to your share of the premium, requires you to cover at least $ 2600 in out of pocket health expenses (i.e. co-payments, extra charges for specialized surgical procedures), then you have the option of placing up to $ 6750 in a Health Savings Account (HSA) on a family insurance plan or $ 3350 for a single person plan. If you and/or your spouse are over the age of 55, you have the option of putting an additional $ 1000 in the HSA as well. Money contributed to the HSA is deducted from your income, regardless of whether you itemize deductions or not and escapes federal taxation (states vary on how they treat these contributions).
While many of us are inclined to only contribute the amounts we need for our un-reimbursed health expenses annually, that is not a strategy which takes full advantage of this benefit. Rather, contributing the maximum amount, whether the money is actually used for health-related expenses in a specific year is what achieves the maximum benefit. Not only will you receive the highest possible deduction on your current year taxes, the money will grow tax-free and will always be available to you for future un-reimbursed health expenses. Many HSA plans now give you the option to invest the funds more aggressively than a low-interest bearing account, although not as aggressively as the typical 401(k) plan or IRA. Your HSA is also portable; when you leave a particular employer, you may take it with you, either to your new employer’s HSA or invested through an independent HSA administrator (which you can find at www.hsafinder.com). When you retire, you will have built up a fund from money that was never taxed at the federal level (and possibly the state level) and grew tax-free throughout your life. You can it use for your health-related expenses, which are likely to be costly during your retirement years. That in turn leaves your 401(k) and IRA funds available for other retirement expenses.
An HSA that you contribute to over the years may not be the kind of glamourous tax shelter in the Cayman Islands to brag about, but if you contribute enough money to it over the years and have substantial funds in it before retiring, it will serve you well in your retirement years.