Health savings accounts can be great for many people, but they can be especially useful for commercial real estate brokers and other self-employed people who have high-deductible health insurance plans.
Annual open enrollment periods for health insurance are often in October and November, so now is the time to think about health savings accounts and health insurance in general.
What Is A Health Savings Account?
A health savings account, also known as an HSA, is an investment account that lets you save for future health insurance expenses. The Internal Revenue Service (IRS) sets a maximum contribution level for each year. The HSA contribution limit in 2025 is $4,300 for single coverage and $8,550 for family coverage. If you are age 55 or older, you can contribute an additional $1,000. Contributions to HSA’s are pre-tax; this reduces your taxable income and you don’t pay federal income tax on your contributions. Also, some employers contribute to HSA’s on behalf of employees. Again, this is not taxable to you, but the total contribution (your contribution plus your employer’s contribution) cannot exceed the maximum contribution level.
If you are self-employed, you can still contribute to and HSA, provided that your health insurance plan meets the HSA requirements, as outlined below.
Health Savings Accounts Have Triple Tax Advantages
The beauty of HSA’s is that they have three tax advantages.
First, as noted above, contributions to HSA’s are pre-tax, so you don’t have to pay federal income taxes on the money that you put into an HSA.
Second, the earnings of an HSA are tax-free. Your account value can continue to grow without taxes. You can buy and sell investments within the account without triggering any capital gains taxes.
Third, withdrawals from an HSA are tax-free, as long as you use them for qualified medical expenses. For example, if you contribute $5,000 to an HSA, then it grows to $6,000, and then you withdraw the $6,000 to pay for qualified medical expenses, you won’t pay income taxes on any of the $6,000.
Once you reach age 65, you can use HSA funds for non-medical expenses, but you will have to pay income tax on amounts that are not used for medical expenses. Prior to age 65, not only will you have to pay income taxes on amounts that are not used for medical expenses, but you will have to pay a 20% penalty as well. This 20% penalty goes away after you turn 65. You never have to pay income tax (or a penalty) on amounts used for qualified medical expenses, regardless of your age.
Health Savings Accounts Can Be Better Than Flexible Spending Accounts
Instead of an HSA, some people choose to use a Flexible Spending Account (FSA). FSA’s have the same advantage in that contributions to FSA’s are tax-deductible. The problem with FSAs is that they are “use it or lose it.” Every year, you have to spend what you put into an HSA or you lose the money completely–FSA’s aren’t investment accounts that can grow over time.
Why Can Health Savings Accounts Be Good For Commercial Real Estate Brokers?
Health Savings Accounts must be paired with high-deductible health insurance plans. If your health insurance plan does not qualify as a high-deductible plan, then you can’t contribute to an HSA during that year.
Generally speaking, high-deductible health insurance plans tend to have lower premiums than other health insurance plans. These lower premiums are attractive to people who don’t have employer-provided health insurance and therefore have to buy insurance on the Healthcare Insurance Marketplace or from other private health insurance providers. They are also attractive to people who have variable income that is not as predictable month-to-month. By keeping fixed living expenses (like health insurance) low, it can be easier to manage a variable income.
Healthcare costs and health insurance costs have been increasing at a high rate for a number of years. Therefore, they have become a larger part of nearly everyone’s financial condition and outlook. They are also complicated to understand, and complex and shifting income tax treatment of health insurance and healthcare costs further complicates issues for everyone. But accounting for these is an important part of a comprehensive financial plan, especially for real estate brokers and other self-employed people.
At Dominion Financial Advisors, we can help you review and understand how health insurance can fit into your full financial picture. Schedule a complimentary consultation to help give you greater certainty and peace of mind about your outlook.