Health Savings Account Basics
A Health Savings Account (HSA) is one of the best deals in the tax code. Money that is put in to an HSA is deductible from your income in the year contributed similar to an IRA or 401k. The big advantage is that distributions from an HSA are not included in income, unlike other retirement plans that require you to pick up distributions as taxable income. However, there is a requirement that HSA distributions be spent on medical expenses, which we will all have sooner or later.
If you are expecting medical bills, but you are short on cash you might consider a Qualified HSA Funding Distribution (QFHD). This allows you to directly transfer the funds from your Traditional IRA to your HSA and not pay taxes or penalties on the IRA distribution as long as you follow the rules. For most of our clients in the 25%+ brackets; this would mean tax savings of $1700-$2700!
If you think this does not apply to you because you do not have an HSA, I have good news! You can still set up an HSA for 2016 as long as you have qualifying high-deductible medical insurance. And if you do not want to tap into your IRA to pay medical bills or do not have an IRA, you can make a normal contribution to your HSA to receive the same tax savings.
Many of the rules surrounding an HSA or QHFD are complex, so we would recommend consulting with us or another tax professional before taking action and again when filing your return. If you want to do more research you can consult IRS.gov and Publication 969.