What’s the difference between a 401K, an IRA and an HSA (Health Savings Account)? As smart ways to shelter income, less than you might think.
Each permits people to shelter income. Each one can be invested to earn additional tax-free income. But when you add in the powerful tax-free health payment benefits of an HSA, its power as a financial instrument truly begins to be appreciated.
With an HSA, one can:
– pay the deductible of your health insurance,
– pay medical bills,
– pay for prescriptions,
– pay for medical incidentals like aspirin, contact lenses, cough drops etc.,
– pay one’s health insurance premium,
– and more . . . all with pre-tax dollars.
In addition, as a tax free savings account, HSAs shelter income that remains one’s property forever and can even be passed on to future generations. In fact, even if you were to lose your job or business, your HSA continues as your property from which you can pay health premiums, deductibles and more.
The only qualification to having an HSA is that one must be enrolled in a federally qualified High Deductible Health Plan (HDHP). Your health benefits advisor can help you organize and administer your own HSA, as well as the HSA program for your business.
Because neither a 401K nor an IRA offers health payment advantages, we recommend raising the HSA’s stature among your tax planning opportunities, as you plan for the New Year. In most cases, it pays to put “dollar one” in your HSA, before other sheltering options. If you don’t have an HSA and you qualify, start one. Or if you already have one, make a resolution to maximize your annual HSA contribution because of its valuable double benefits as both a savings account and a health payment account funded with pre-tax income. No other tax shelter can compare.