By Dale Lewis
The end of the year, with all the holiday commotion, is the good time to be thinking ahead financially.
If you are eligible, two critical elements of your financial plan should be a Health Savings Account and an Individual Retirement Account. They are both unique opportunities to strengthen your overall financial plan.
HSAs allow qualified participants to put aside money tax-free to cover qualified medical and health expenses, such as visits to the doctor, dentist, optometrist and prescription drugs. The only requirement for an HSA is that your health insurance must be a qualified high-deductible plan. That means you pay a deductible of a sufficient amount before your insurance kicks in to cover medical expenses, including prescription drugs.
The tax-deductible contributions you make to your HSA are deductible in the year you make them rather than the year you need them, which makes this a terrific planning tool.
HSAs not only let participants save tax-free. They also allow their owners to grow funds tax-free and spend those funds tax-free on qualified health expenses. And there is more good news: The limits for HSA contributions will increase slightly to $3,350 for individuals and $6,650 for families in 2015. There is also a catch-up provision if you are close to retirement.
With a tax advantage and no expiration on when you must use your saved health-care money, there’s no better tool than the HSA to save for health expenses.
IRAs have been around longer, so more of us are aware of them. This is another kind of savings account. It allows participants to put aside money for retirement in ways that also can provide tax benefits. But even more important than the potential tax benefits, IRAs help their owners save for the day when they will no longer be working. That is important for all of us.
There are two kinds of IRA accounts—traditional and Roth. Contributions likely are tax-deductible. As with HSAs, you must qualify to be eligible for the tax benefit. It depends on your earned income for the qualifying year.
IRAs also grow tax-deferred, with funds distributed upon retirement. The details are not complicated, but they can be different for each of us, so it’s always best to talk to your tax adviser before opening an account.
This also is a good time to adjust any automatic retirement savings plan at work in addition to an IRA. If you have such an option through your job, I strongly recommend that you look at it closely every year, especially if your employer has a matching program for employees who make contributions. If you have a program like this and you’re not taking advantage of it, you’re essentially missing out on free money from the boss.
The end of the year may be a time when you have a little extra money, such as a work bonus or a realization that you have funds left over from a good year financially. In that case, I suggest you consider opening an HSA or an IRA with some of that extra cash. You won’t find a better use for those funds anywhere.
I also know that this time of year can be difficult for personal cash flow, with holiday spending taking a toll. If that’s the case, all is not lost. Make a New Year’s resolution that you will save for health expenses and your retirement in 2015. Take time now to look into an HSA and an IRA or a work-related retirement savings plan. If they make sense for you, open the accounts now and get started for 2015. There is no time like the present.
HSAs and IRAs are available through your local bank. Your banker should be able to talk to you, in person or on the phone, and quickly determine which of these options is right for you.
I know this is a busy time for everyone. But if a few minutes of conversation at the end of the year could save you money and help prepare you for a stronger financial future, would it be worth it?
Consider it a holiday gift to yourself.
Dale Lewis is president and CEO of Park State Bank in Duluth. You can reach her at email@example.com or 218-722-3500.