It’s finally open season on the U.S. health insurance exchanges. I’ve been looking forward to it for months! Most people think of U.S. health insurance as horribly expensive, unwieldy, and unjustifiably bureaucratic. And it is! But, there are some tremendous tax advantages built into the system that most folks aren’t even aware of, and they are especially good for 2018. This year, I’m taking it DEEP into health insurance tax advantages.
Not only will my 2018 health insurance be free, but I’ll generate massive recurring tax benefits for years and years into the future. I’ll even get huge discounts on my kids’ college tuition because of it! The financial benefits can be enormous!
I estimate I’ll have about $16,500 of current and future tax benefits thanks to my 2018 health insurance plan. That’s a lot of money! How is all of this possible? Here’s my plan:
Free Health Insurance in 2018
In 2018, due to a quirk of the Affordable Care Act subsidy rules, most Americans now have access to free health insurance – so long as you don’t make too much money. In 2018, at least 60% of all counties across the country offer a free Bronze plan. This is because the tax subsidies for consumers below 400% of the poverty level are calculated based on the cost of the Silver plans. And the Silver plans just got a lot more expensive in 2018.
So, basically, since the Silver plans became so expensive, the subsidies available to be used for the Bronze plans also became much higher. This has made Bronze plans free – or virtually free – if you qualify for the subsidies.
In my case, if my family of four makes less than $60,000 during 2018, then we’ll qualify for a free Bronze plan in California. Ok, it’s technically $4 per month to be exact – but let’s just call that free. The subsidies are worth $926 per month in my case – a tax benefit of $11,112 for the whole year.
We’re going to make sure we don’t make more than $60,000 for 2018.
Update: As a word of caution, these premium subsidies that will give you a free Bronze plan are only available if you are not offered insurance through your workplace. That’s not a problem for me.
The Bottom Line
We don’t want to make too little either, for that matter. If we make less than 138% of the poverty threshold (currently that’s about $34k for a family of 4 in California), then we would qualify for Medicaid, and we would be liable to pay back some of the $11k of Obamacare subsidies we received. So, for this scheme to work flawlessly, our family needs to make between $34k and $60k in 2018. But, we can always add income by converting pre-tax retirement funds into Roth. So, no problem!
That’s how it works in states like California that have expanded Medicaid. States without expanded Medicaid work differently. You won’t get booted from the ACA plans unless your income drops below 100% of the poverty line. But if it does, you also don’t have to pay back ACA subsidies either. Unfortunately, in that event, you would very likely then have to pay full cost for insurance though. So, it’s best to keep your income above 100% of the poverty line in states without expanded Medicaid.
I’m buying my health insurance in California, but chances are, you have access to a free Bronze plan in your state too. Check your state’s exchange website. If you sign up for a Bronze plan you can generate huge recurring tax benefits for years into the future too. Here’s how:
HSA Compatible Plans
I’d really prefer to get a catastrophic insurance plan which only covers truly catastrophic expenses. That’s what “insurance” is supposed to do. Having insurance plans that pay for every little doctor visit, procedure, and prescription, is one of the many many reasons our health care is so expensive in the U.S. But that’s a whole different topic. If the law says I can’t have a catastrophic plan, then a Bronze plan is the next best thing. So lets get back to the free Bronze plans in 2018.
Don’t get just any Bronze plan. Make sure your free Bronze plan is HSA compatible. That’s because the Health Savings Account (HSA) is the most badass retirement account around.
No, I didn’t mispeak. It’s the best retirement account because it has triple tax benefits. You get a tax deduction on your initial contribution, your earnings are not taxed, and even your withdrawals are tax-free. Plus, you have more flexibility and discretion to withdraw whenever you like. That’s way better than any 401k or IRA available.
To qualify for these tax advantages, you need to incur qualified medical expenses at some point in the future. But you don’t have to withdraw funds from your HSA in the same year that you incur those medical costs. Pay for your medical expenses using taxable funds, not your HSA. Then you can keep your money inside the HSA for as long as you wish, gaining tax-free until you choose to withdraw – say for retirement spending far in the future.
2018 HSA Contribution Limits
In 2018, the HSA contribution limits have gone up. That’s awesome, because it means you can protect even more money from taxes for years to come. Here are the 2018 HSA contribution limits:
2018 HSA Contribution Limits
|Catch Up (>55) Limit||$1,000|
The Future Tax Benefits of My 2018 HSA
Just how valuable are the tax advantages of HSAs? Check it out! If I contribute the maximum $6,900 HSA contribution for 2018, I’ll have an immediate tax benefit for 2018 of $690
(*assuming I’m in the 10% tax bracket under current tax law. If the GOP tax plan passes Congress, I’ll be in the 12% bracket, and my benefit will be $828. If you’re in a higher tax bracket, the benefit is larger)
In other words, if I sign up for a FREE Bronze plan and contribute to my HSA, I’ll get an immediate tax benefit of several hundred dollars. But, that’s not where the big benefits lie. The big tax advantages lie in the future.
My $6,900 will continue growing tax free until I withdraw it for retirement spending years in the future. If I keep it in the HSA for 10 years and invest in a low cost index mutual fund, I can expect my HSA contribution to grow at about 10% per year. After 10 years, it should be worth around $18,000. And all those gains will be tax free!
If I’m in the 10% bracket when I withdraw, that will be a $1,110 tax benefit on the $11,100 of tax-free gains.
But Wait, There’s More!
Not only are HSAs the best retirement account around, they are also the best college savings account. And again, the competition is not even close. 529s and Coverdale accounts don’t hold a candle to HSAs when it comes to saving for college.
That’s because, unlike those traditional college savings accounts, HSAs can actually get you massive college discounts. Perhaps even completely free college tuition, with just a little planning.
On the FAFSA and CSS profile forms (used to determine student aid at nearly all schools), HSA account balances are ignored completely. The more money you stash in an HSA, rather than in taxable investment accounts, the poorer you look on paper. And the more free college money you – or your child – qualifies for.
But we’re not done yet! Withdrawals from HSAs are also not counted as income either by FAFSA or CSS! If you have kids in college, having income is about as desirable as some weird tropical disease, thanks to the University Tax.
But HSA withdrawals are not income! That means you can take money out of your HSA to pay for college, and it won’t result in a University Tax which directly increases your tuition bills. That makes HSAs better than either retirement accounts or college savings accounts when it comes to saving for college.
I can’t put an exact value on this massive tax advantage of HSAs as a college savings vehicle, because it will depend on which school my kids go to and how much of a tuition reduction we get. But as a rule of thumb, the University Tax can be about 20% of your unprotected assets over a four year college education. By stashing money in an HSA in 2018, I might expect to save $3,600 in future tuition discounts (20% of my expected future HSA account value, $18,000).
Health Insurance Tax Advantages
These are some VERY DEEP health insurance tax advantages. Let me sum them up. In 2018, I’ll be getting about $11,112 of tax subsidies for my free HSA-compatible Bronze plan, so long as I keep our household income below $60,000. Once I invest in my HSA, I’ll get at least $690 of immediate tax benefits due to my 2018 HSA deduction. Further, I’ll get around $1,110 of future recurring tax benefits as the account grows tax free over the next decade. Finally, I’ll use my HSA as a stealth wealth vehicle to get massive college discounts for my kids – probably worth around $3,600 in tuition reductions.
Add it all up, and I’ll have around $16,500 of tax benefits just for signing up for an HSA-compatible Bronze plan. That’s a lot of money! So you can see why I’m signing up for a 2018 health insurance plan even though I couldn’t possibly use the actual insurance.
Buying Health Insurance Only For The Tax Benefits
That’s right. My family of four is currently out of the country for an entire year. Under U.S. law, we are exempt from the individual mandate to purchase health insurance until we return stateside in mid 2018. We can’t use the insurance while we are abroad because U.S. health insurance plans are virtually useless outside of the U.S. Instead, we have an international travel insurance plan from World Nomads that covers us for catastrophic medical emergencies while we travel.
So, yes, we are ONLY signing up for our free HSA-compatible bronze plan due to the huge tax advantages.
For just $4 per month I get a worthless insurance plan that comes with thousands and thousands of dollars of current and future tax benefits. I just have to make sure my household income doesn’t go above $60,000 for 2018. That won’t be a problem at all!
And THAT, my friend, is how you go DEEP into health insurance tax advantages.
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