HSAs (Health Savings Account) and FSAs (Flexible Spending Account) are both vehicles used to set money aside for medical expenses. Each type of account provides an excellent means to pay for medical bills with pre-tax money. Provided the money set aside in either type of account is used to pay for qualified medical expenses there is no income tax paid on the money. If you do contribute money that you have already paid income tax on you will be able to deduct that amount from your taxable income when you file your tax return.

As the names of the two accounts indicate the HSA stresses a savings aspect whereas the FSA stresses spending. The main difference between the two is any money left in an HSA stays in the account until it is used even if it is many years later. The money must be used for qualified medical expenses but until you use the money it will continue to earn while it remains in the account. But with a FSA, typically the money must be used within the year in which it was contributed. Some FSAs may be extended for a short period of time but there is definitely an end date specified. The most important thing to remember with a FSA is the use it or lose it aspect therefore it is extremely important to estimate how much you might need for medical expenses. If an individual happens to miscalculate, the wise thing is to schedule those necessary but not time sensitive tests or medical exams before the money is lost.

Other differences between these accounts include the way they are funded. A FSA is funded when a predetermined amount of money is deducted from your paycheck and placed into the FSA for your use during the year. With an HSA, contributions may come from your paycheck, your employer or you may contribute on your own. Additionally to qualify for an HSA account you must have a high deductible health insurance plan. Another difference is what qualifies for medical expenses in that with a FSA day care for children, elderly and dependent adults also qualifies but not with an HSA.

Whichever account you determine meets your needs for paying medical expenses, you will benefit from the tax savings on money you must spend so why not take advantage of the tax savings while paying those medical bills?

Submitted by Kathryn Shrader, Postema Accounting Solutions

Before taking any tax or penalties into consideration, just the fact money intended to fund retirement will be reduced by a withdrawal should be enough to cause most individuals to reconsider and find another method to pay those bills. Any money withdrawn will no longer have the ability to earn money thus not only is the initial money lost but any potential for that money to earn is lost once it is withdrawn.

If an individual contemplating withdrawing his or her retirement funds is under 59 ½ typically there is an early withdrawal penalty of 10% which must be paid either at the time of withdrawal or at income tax time. Additionally, any money withdrawn is subject to the individual’s federal, state, and possibly local income tax rate plus the amount withdrawn might be enough to push the taxpayer into the next federal tax bracket. Even what might be considered a moderate withdrawal amount can be rapidly depleted by taxes and penalties.

Using a scenario of withdrawing $10,000, the taxpayer will pay $1,000 for the 10% early withdrawal penalty, then if he or she is in the 25% bracket another $2,500 for federal income tax. At this point the $10,000 withdrawal is down to $6,500 and that’s before state and any local taxes!! If the state rate is a moderate 5% the taxpayer will pay $500 and is left with $6,000. In areas with a 1% school income tax rate, the money needed to pay this school income tax will cost the taxpayer another $100. Therefore, paying those bills with the remaining $5,900 by withdrawing $10,000 will cost the taxpayer $4,100 or 41%!!! Ouch!

Suddenly, a part-time job to pay those bills is looking better and better.  But if a part time job is not possible, there are other options which should be investigated before tapping retirement money. This would be an excellent time to check with your financial advisor for suggestions. Any scenario should be more appealing knowing that withdrawing retirement money can cost so much in the long run.

Submitted by Kathryn Shrader, Postema Accounting Solutions

This year’s income tax season ended a little over a month ago so no need to worry until next tax season, right?  Wrong!  Too many individuals put all thoughts of their income tax into the same box/container which holds the copy of their income tax return. Unfortunately, the only thing this action accomplishes is storing last year’s information until it is needed.

Now is the perfect time to plan and prepare for next year. How many of us did not keep copies of receipts which prove deductible items? Too many, according to many sources which track this type of information and without proof the item should not be deducted. What a waste of a potential money saving deduction.

Since what can and cannot be deducted should be relatively fresh in everyone’s mind, now is the time to set up a folder or special place to store receipts until they are needed for next year’s income tax return preparation. Also when placing the receipt into its new home, take a careful look at what is on the receipt. Typically, you might know exactly what the receipt is for now but will you know in another eight months?  Next income tax season you will be very thankful you took the time to indicate what the receipt is for directly on the receipt.

It is never too early to begin to plan as well as get organized for the next income tax season; the sooner the better so you have less “backtracking” to do. Initially, getting organized might some time but when next year’s tax season rolls around you will be ready and thankful you took the time to get prepared by organizing and marking your receipts early. Just remember to keep up with marking, organizing and keeping your receipts as the year progresses.

Submitted by Kathryn Shrader, Postema Accounting Solutions