ROCHESTER, N.Y. — Open enrollment is underway and the choices people make now can have a big impact on their finances and health.
Frank Maltais of Fidelity Investments said, “Maybe you had a baby, got married, had a health issue or maybe saw some changes in your budget. Then I’d take a look at what benefits you actually used last year especially when it comes to healthcare.”
The four main choices during open enrollment are health insurance, 401(k), health savings account (HSA) and flexible spending account (FSA). All four options are pre-tax if offered through an employer, which means the cost is taken out of a paycheck before taxes are calculated, lowering taxable income and possibly putting someone in a lower tax bracket.
An HSA is a tax-advantaged account used to pay for medical expenses now or in the future.
If you are getting these through your employer, all four are pre-tax, that is your employer taking the cost out of your paycheck, lowering your taxable income, and could put you in a lower tax bracket. For example, $50,400 is the cutoff between the 12% bracket and the 22% bracket. That’s a 10% difference. So lets say you make $51,000 knocking you into the 22% bracket. If, for example, you sock away just 5% of your salary in a 401(k), that knocks you into the 12% bracket so the government takes 10% less of your money.
“A health savings account or hsa is a tax advantage account to pay for expenses either now or in the future,” Maltais said.
“And I like to think of this way. Tax free times three. Contributions are tax free going in and if you choose to invest those funds they will grow tax free and then they can come out tax free for qualified medical expenses as well,” Maltais said.
An FSA can be used for health expenses or childcare, but unlike an HSA, the money cannot be invested and must be used by the end of the year.
No matter which tax-saving option is chosen, people are essentially paying themselves and potentially giving the government less.
Consumer Alert: Open enrollment choices for health insurance, 401(k), HSA and FSA can affect your taxes WHEC.com.
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