Self Employed Tax Deduction Tip - Open a Health Savings Account (HSA) coupled with a High Deductible Health Plan (HDHP)If your self-employed and looking for a nice tax deduction and tax deferred investment vehicle, then consider opening a Health Savings Account and couple it to an HSA eligible health plan.
A Health Savings Account is a great option for self-employed individuals not currently on Medicare. Just about anyone age 65 or younger who buys a qualified health insurance policy with a deductible of at least $1,000 for individuals, $2,000 for families, can open an HSA. An HSA lets you set aside pretax money up to the amount of the deductible (with an annual maximum of $2,600 for singles; $5,150 for families). This money can be used tax-free for medical expenses. Anything left over will grow tax-deferred similar to an IRA. After age 65, you're allowed to use the money for anything without penalty. However, you will still owe income taxes on any money that isn't used for medical expenses.
The combination of a high-deductible policy (HDHP) and an HSA can result in cost savings that make up for the higher out-of-pocket medical expenses. The tax benefits are also a strong positive factor. Many financial institutions that offer Health Savings Accounts allow you to invest the money in stocks, bonds, mutual funds as well as more conservative interest bearing investments.
We searched on eHealthInsurance for an HSA-eligible policy and discovered one from Golden Rule for just $250 per month. It was an HDHP with a hefty $5,000 per year deductible, however, we would be saving over $6,000 per year in premiums compared to many of the standard "lower deductible" policies we found. We could instead invest almost that much into a health savings account, which will be used to pay the extra out-of-pocket expenses.
It's a true WIN-WIN situation because it's paid back in less than a year. If you don't use the deposited money, then it's rolled into retirement dollars.
Even though the deductible is higher, many people would still rather save the money on premiums and have more control over medical expenses. HSA's offer great flexibility in physician choices while also saving for retirement. Check out the HSA Insider Web site for a list of insurers offering HSA-eligible policies and financial institutions providing the investment accounts. You'll also find free price quotes for several HSA eligible insurers at eHealthInsurance.
If you've been self employed for a while, then you probably already have a health insurance policy protecting you and/or your family. If so, then compare your current plan with other HSA eligible plans at eHealthInsurance. You may find that an HSA eligible policy could save you more money and give you more health care choices than your current provider. Another free quote service which can give you additional plans from which to compare is InsureMe - Health.
You may also already have a spouse whose covered under an employers group health plan. If you're already covered under a spouse's group plan, then it may not be beneficial for you to switch to an HSA/ HDHP combination just for yourself. Consult a financial advisor if you're uncertain.
Related Articles:
10 Things You Should Know About Health Savings Accounts (HSA's)
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