As a self-employed individual, healthcare coverage and retirement savings can often fall by the wayside. In fact, only 34% of self-employed individuals have health insurance as compared to 84% of their traditionally employed counterparts. (1) Not only that, but they are also less likely to save for retirement, with nearly 70% either not saving regularly or not saving at all! (2) Health savings accounts (HSAs) can be a great way to alleviate this problem by combining healthcare coverage and retirement savings into one easy-to-navigate vehicle! Here are some important things to consider when deciding if an HSA is right for you.
You Must Be Enrolled in a High-Deductible Health Plan
HSAs are only available to self-employed individuals who are enrolled in high-deductible health plans (HDHPs). According to the IRS, HDHPs are defined as health insurance plans with $1,400 deductibles for individual coverage or $2,800 for family coverage. (3) If you are claimed as a dependent on someone else’s tax return, enrolled in Medicare/Medicaid, or covered by another health insurance plan, you are not eligible for an HDHP and therefore cannot open an HSA.
HDHPs can be a convenient option for self-employed individuals since they usually have much less expensive premiums than traditional health plans. Once eligibility is confirmed, you can easily open an HSA with your bank or another FDIC-insured institution.
HSAs Offer Triple-Tax Benefits
HSAs were first created in order to offset the high out-of-pocket costs associated with HDHPs by allowing people to save money for these expenses in a tax-advantaged way. As such, HSAs provide three tax benefits that offer self-employed individuals a uniquely tax-efficient way to save. For instance:
- Contributions are tax-deductible in the year they are made.
- Earnings on contributions are tax-free.
- Withdrawals are completely tax-free if used to pay for qualified medical expenses.
And unlike flexible spending accounts (FSAs), HSAs do not force you to “use it or lose it” each year. Instead, money saved in these accounts will automatically roll over from year to year, earning interest along the way.
HSAs Can Be Used to Save for Retirement
Recently, HSAs have grown in popularity as a tax-advantaged way to save for retirement. This is because the account essentially becomes an IRA or 401(k) once you reach age 65. At that point, funds can be withdrawn at any time and used for any expense. You will have to pay income tax on the amount withdrawn, but there will be no penalties or fees applied.
With annual contribution limits of $3,600 for individual coverage and $7,200 for family coverage, (4) HSAs can be a great way to save for retirement, especially if you can afford to pay for medical expenses out of pocket and allow the HSA funds to grow tax-free.
How We Can Help
At Birds Eye Wealth Planning, we know that healthcare and retirement savings are important parts of any self-employed business model. We also know that you don’t always have the time or energy to sort through it all on your own. We can simplify the process and help you make the best decision, so you can get back to being your own boss. Schedule a free, introductory phone call online or reach out to us at 609-532-1090 or by email at rob@birdseyewealthplanning.com.
About Rob
Rob Walsh is president and founder of Birds Eye Wealth Planning, an independent financial advisory firm dedicated to partnering with our clients and helping them achieve their financial goals. With over 20 years of experience, Rob is passionate about providing comprehensive, goals-based financial planning designed to match each client’s individual needs, goals, and priorities. Rob serves married couples with children and divorcees, seeking to bring clarity to their financial world by taking both a macro (bird’s eye) and micro view of their financial situation. Rob is known for simplifying complicated financial concepts and strategies, building long-term relationships with his clients, and being there for them no matter what life throws their way.
Rob graduated Summa Cum Laude from Rider University, where he was a member and captain of their baseball team for four years. When he’s not working, you can usually find him cheering for his son and daughter at one of their sporting events. He coaches Howell South youth baseball and also loves a good round of golf. To learn more about Rob, connect with him on LinkedIn.
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(1) https://quickbooks.intuit.com/r/healthcare-and-benefits/health-insurance-self-employed/
(2) https://ithinkbigger.com/survey-28-of-self-employed-dont-save-for-retirement/
(3) https://www.healthcare.gov/high-deductible-health-plan/hdhp-hsa-information/
(4) https://www.healthcare.gov/high-deductible-health-plan/hsa-eligible-hdhp/