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Saving

Rules for a Health Savings Account (HSA)

Health Savings Account (HSA)
Health Savings Account (HSA)

I remember the excitement of starting my career fresh out of school.  My employer went through all of our benefits, and briefly mentioned the high deductible health plan.  I should have paid more attention to the details of my health coverage.  The focus was on my salary, 401(k) match, and paid time off.  More attention would have been made If I knew about the tax advantages of an health savings account (HSA).  Additionally, my employer made a $500 annual contribution, which I assumed to be enough to cover my health care costs.

A Health Savings Account (HSA) is a diversified savings and investing tool that can be used for medical expenses. Personally, it is one of my favorite savings and investing tools.  An HSA is a health coverage that incorporates a high deductible health plan (HDHP) with a savings account that allows an individual to save money.  The money is deposited before taxes.  It can be used to cover qualified medical expenses. It is also known as a triple tax-savings vehicle.

The intent of this post is to for two things.  The first, is to share the IRS laws for contributing to an HSA,  The second, is to share my approach in handling an HSA and my contributions.

Next, I will discuss how my HSA has affected my annual taxes.

How Does an HSA Impact my Taxes?

Health Savings Accounts (HSA's) are known as a triple tax savings vehicle. The intelligent investors use this as a mechanism to lower their yearly tax expense, accumulate capital gains (tax free), and pay for qualified medical expenses without being taxed or penalized.  Next, I will discuss the three tax savings advantages in more detail.

The first, your annual tax bill is lowered.  If possible, I always attempt to max out my annual HSA contribution.  It has an astonishing benefit of lowering an individual's adjusted gross income (AGI).  In other words, my employer deposits my specified contribution amount into my account.  This occurs without a reduction from taxes. This "above the line" reduction lowers my AGI. Consequently, this decreases my annual tax bill.  I am always trying to reduce costs.  That includes the pesky Federal Insurance Contributions Act (FICA) expense.  Indeed, taxes are costs too.

Tax Day!
Tax Day!

The second, investment gains will be tax free.  Upon reaching a specified amount, a health savings account balance can be invested. The money can be placed into index funds or bonds. The invested assets can accumulate more wealth, which will not be taxed. Do not forget about the eighth wonder of world, compound interest!  For this reason, I maximize my HSA contributions.

Lastly, my investment gains can pay for qualified medical expenses, tax free.  Indeed, I do not pay taxes on funds that are withdrawn to pay for qualified medical expenses.  This will be beneficial in retirement.  Undoubtedly, health care needs will arise in older age.

Next, I will review who can qualify for an HSA.

Who Qualifies for an HSA?

According to the IRS, an individual can qualify for an HSA if they:

  1.  Are covered under a high deductible health plan (HDHP), on the first day of the month.  The minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs are as followed:
    Minimum Annual HSA Deductible and Maximum Annual Deductible and Other Out-of-Pocket Expenses
    2020 Minimum Annual HSA Deductible and Maximum Annual Deductible and Other Out-of-Pocket Expenses (Source IRS)
  2.  An individual has no other health coverage except for what is allowed by the IRS.
    • Generally speaking, someone who has a HDHP and a FSA or an HRA that reimburses qualified medical expenses cannot contribute to an HSA.  However, there are certain arrangements that are allowed.  Consulting financial planner can aid in understanding these arrangements.
  3.   The individual is not enrolled in Medicare.
  4.   You are not eligible if you are claimed as a dependent on someone else’s tax return.

What is the Maximum Annual Contribution to an HSA?

There are a couple of answers to this question.  First, you must remain an eligible participant of an HSA. Secondly, contribution amounts are dependent upon who your insurance covers.  The contribution amount for a single individual (in 2020) is $3,550.

If the insurance covers a family, than the contribution limit is $7,100 for 2020.  In my opinion, this is a substantial reduction in a family's adjusted gross income (AGI).  Subsequently, this reduces the burden of the annual tax liability.

An individual should reduce their HSA contribution if their employer also contributes to it. This is important to consider when automatically depositing from your paycheck each month.

Again, medicare recipients are not allowed to place contributions into their HSA's.  This commences on the first day, of the first month an individual is enrolled in it. This rule applies to periods of retroactive coverage (backdated coverage).  However, upon reaching 65 an individual can withdraw money out of their HSA for non-qualified medical expenses without a penalty tax. Although, they will still be subject to pay income tax on that specific amount. This is not true for those younger than 65.  Unfortunately, they may be subject to a 20% penalty tax in addition to the income tax.

What are Qualified Medical Expenses?

There is a list on the IRS website that defines qualified medical expenses.  Generally, these would be some expenses listed on the IRS' website under the Publication 502.  For simplicity, I have listed some common items covered:

  1. Hearing aids
  2. Breast pumps
  3. Eyeglasses
  4. Prescription drugs
  5. Dental treatments
  6. Co-Pays
  7. Vaccines
  8. Wheelchair
  9. Vasectomy
  10. Flu shot
  11. Insulin
  12. Infertility Treatment
  13. Chiropractor
  14. Ambulance

It should be noted, that these change regularly. If unsure, review the documents on the IRS website.  It is important to review and stay on top of the changes to prevent a 20% penalty.

Who Uses my HSA?

Per the IRS' Publication 969, I can use my HSA funds on anyone that is listed on my income tax return.  This includes my spouse, my dependents, and myself.  Even if your family may not be covered by your insurance, they can still utilize your HSA funds.

What Happens to My HSA After My Death?

Again, there is not a single answer to this question.  It depends on who the beneficiary is.  Upon inheriting, a spouse can maintain the HSA as if it were their own.  They can keep using the HSA for qualified medical expenses.  They can even use the funds as income after the age of 65.  Although, they will still be obligated to pay income tax on money not used for qualified expenses.

If the HSA beneficiary is not a spouse, than the account will no long be recognized as a health savings account.  The assets in the account will be distributed to the designated beneficiary.  Subsequently, these funds will be considered on the beneficiary's annual income tax.  Also, the inheritance will not receive any additional taxes or penalties other than the income tax.

In Summary

In conclusion, a health savings account (HSA) is a great savings and investment vehicle.  This is a way for me to save money by reducing my annual tax liability.  Additionally, it allows for me to invest my money.  The tax-free gains can be used for future, qualified, medical expenses.  Moreover, this will be crucial during the retirement years.

The account provides me the ability to invest and carry over a balance from year to year.  If I do not use it, my children will be able to use it once I am gone. Most importantly, the health savings account will grow long-term, while saving us money in the short-term.

Why not have one?  Do you invest your HSA funds?

 

Working Out On a Budget

Working Out On a Budget
Working Out On a Budget

Being on a tight budget, or removed from the gym, does not have to keep you from a healthy, active lifestyle. Working out on a budget will require creativity and focus.  It is possible to have stay fit while reducing costs.

Today, we welcome Kat, who is willing to share some tips for working out on a budget. She is a self-employed pilates instructor who shares topics on health, fitness, and finance.  She recently started an enlightening blog, AChatWithKat.com, that provides FREE resources on exercises and the anatomy.  Check it out!

I hope you find her guest post to be informative, interesting, and educational. Enjoy!

Introduction

Pilates, HIIT, Boxfit or Zumba? When it comes to workouts, you’re spoiled for choice. And the range is constantly increasing: since the Coronavirus crisis, a lot of gyms have moved their offers online

Top Tips for Low-Cost Workouts

So, how can you do an effective workout without breaking the bank?

The most effective exercise routine includes cardio, some weight or resistance training and some stretching. Overloading your muscles through weight training not only helps them to grow stronger and become more effective at burning calories, but it also has many secondary health benefits such as increasing bone density and heart health. One cost-effective way to work out is to buy a set of weights and combine the weight training with some running or swimming. Instead of the ongoing cost of the gym, you have a one-off expense. High quality weights can last for decades, so they are worth the cost.

However, if you have limited space at home or move around a lot, you can do bodyweight exercises instead. If done well, they have a similar effect as workouts involving weights. Here are my favourite types of free bodyweight workouts:

1.  The 5BX or XBX

This is a workout designed for the Royal Canadian Air Force. It contains five basic cardio, strength and stretching exercises that get harder as you progress through the levels. The 5BX is for men and the XBX for women and they can both be completed in a very small space in under 15 minutes. This is a great way to keep a base level of fitness with little effort.

2.  Youtube Workouts

There’s no shortage of workouts available on Youtube. If you’re new to exercising or have trouble getting motivated, consider starting with 10-minute segments. It is much less daunting to start exercising if you know it will be over in 10 minutes. For more experienced people, Pamela Reid offers a wide range of challenging workouts on Youtube.

3.  Free Outdoor Exercise

In most bigger towns, there is at least one free or cheap outdoor exercise group. This could be as simple as a running or hiking group or as organised as London’s Our Parks system, a community of trainers offering free sessions in countless London parks.

Motivating Yourself Without a Trainer

A personal trainer does more than just select appropriate exercises: he or she helps the client to stay on track and motivated over the long term and it can be hard to achieve this on your own. Let’s explore some strategies we can use to stay motivated when working out independently.

Firstly, make sure you know what type of person you are. If you are good at motivating yourself, you could draw up an exercise plan and tick off each workout when it’s done. However, if you need accountability to stick to your goals, speak to your friends about your goal and tell them to ask you about it in a month’s time. For an even stronger motivator, use the power of shame. Tell your friends:

“If I don’t stick to my routine, I must (insert something embarrassing here).”

For example, I would choose ‘sing at a Karaoke bar’, since that is something I really do not want to do. The thought of having to sing in front of strangers would definitely scare me into working out.

For a more positive approach, you could work out with a group. As mentioned, there are many free outdoor exercise communities available. You can find them through your local notice boards, a Google search or the Meetup app. As an added bonus, such an exercise group is a great place to meet new, like-minded people who are as focused on their goals as you are on yours. And if there’s nothing suitable, why not start your own group?

When to Pay for a Workout

So should everyone do free exercise, all the time?

Of course not! I am a Pilates teacher for a reason, after all. There are instances when a paid class or a gym membership is worth it. Here are examples of people who could benefit from classes or gyms, and some ways for them to keep their costs low and motivation high.

The injured person:  If you have a severe injury or condition, exercising on your own might not be safe. Many of my clients fall into this category. Consider doing private lessons for a while and then transitioning to small group training. You could also ask your trainer to make up a homework routine for you, so that you can exercise for free in between sessions.

1.  The Savvy Saver

If you are already saving 50%+ of your salary or if you are financially independent, you could consider adding some variety to your workout routine by attending a gym or a class. Personally, I joined a budget fitness centre that opened up near my home because I live in a studio apartment and enjoy having a dedicated place to exercise. With a savings rate of 60+%, this doesn’t break the bank for me and if my income or savings rate drops, this is an easy thing to cut out.

2.  The Elderly Beginner

This is another typical Pilates client. 65+ clients who are not used to regular exercise often need some guidance at first. A group class targeted at their demographic could be a nice way of easing into exercise. Many people in this age group also belong to the ‘savvy savers’, so paying for classes won’t harm their finances. If you are an elderly beginner with fewer financial resources, you could look for free outdoor exercise sessions near you.

3. The Pro

If you’re a very experienced athlete or want to do a specialised type of exercise like dance, you’ll need expert coaching at some point. Once you’ve exhausted all the free resources in your community, you have no other option than joining a class. Before you start, research all options in your local area to choose an instructor who’s both qualified and offers good value for money. You could also offer to coach younger students or beginners or do other tasks in the training centre in exchange for a reduced rate or even free classes. When I was dancing in university, I taught at my local studio and the wages covered all of my training costs.

Do you have more tips about exercising for free? What are your favourite tricks and tools to keep your fitness routine affordable?

More about the writer:

Kat with AChatWithKat.com
Kat with AChatWithKat.com

Kat provides biweekly posts on topics such as health, anatomy, finance, self-employment and even philosophy. She loves meeting new people and learning with others. Please take the time to visit the informative website AChatWithKat.com and subscribe to her weekly updates.

Saving Money: Build that Emergency Fund

Hey World!

This is the first post to the FinanciallyEngineered.com blog! I could not find a more suiting topic. We are all in the heart of a deep financial crisis due to a pandemic. The emergency fund is extremely important because I will never know when a pandemic will freeze a roaring economy. According to CNBC, 22 million Americans have filed unemployment since a record low unemployment rate of 3.5%. This indicates that unemployment will be somewhere around 13.5% at the end of April 2020, which will be dramatically higher than the 4.4% posted in March by the U.S. Bureau of Labor Statistics. Mid-March was the initial onset of the pandemic, which is the direct cause of the spike in unemployment.

The average American has $8,863 (according to CNBC) in a readily available account. How many months do you think that will allow the average American to pay their mortgage? According to the U.S. Census Bureau The median monthly payment for a mortgage in the United States is $1,500 ( I can only imagine what a payment would be the East or West Coast). This means the typical American can only pay his or her mortgage for roughly 5-6 months before they run out of that savings cushion. This does not take into consideration other monthly expenses.

That duration may seem acceptable until you look into how much the average American spends daily. According to the Bureau of Labor Statistics, we spend (on average) $164 per day! that equates to almost $60,000 annually! This would equate to approximately 2 months of standard living before the emergency fund is gone…. Needless to say this falls short of the 3-6 month cushion most financial guru’s say you should carry.

Build Up that Emergency Fund!

I will never have less than 6 months of expenses in CASH. The emergency fund is extremely important because I will never know when a pandemic will freeze a roaring economy. I also take into consideration dependents when looking at my emergency fund. I have discovered that emergencies tend to occur more often with children. Building up a savings safety blanket was one of my first goals when I shifted my perception on money management. Saving as much as possible will help reduce the stress of financial crises when they hit .

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