An ISA or individual savings account that lets you save your money with tax free returns.
Individual savings accounts are used for a variety of things, but perhaps the most common type of individual savings or ISA account in the United States is an HSA or health savings account.
HSA accounts allow you to deduct pre-tax funds directly from your paycheck and deposit them into an account meant to cover current and future health care costs.
IRAs or individual retirement plans are also common; these accounts are meant to help people save money for retirement with tax advantages.
These accounts allow their owners to deposit funds on a tax-deferred basis and allow for tax-free growth.
That said, IRA owners will need to pay taxes if or when they withdraw funds from the IRA account, especially if they do so early (usually considered to be prior to age 59.5).
Educational savings accounts or ESAs like 529 plans are also a popular type of educational savings accounts that allow you to save for your child’s or other dependent or relative’s education sans federal taxes or tax penalties for using the funds in a 529 account for qualifying educational expenses.
What is an Individual Savings Account?
An individual savings account or ISA account is a type of savings account that lets you save your money before taxes.
It can also be used for tax-free investments.
In the United States, the most prevalent type of individual savings account is a health savings account or HSA.
An HSA is a tax-free or pre-tax account which is available to tax-paying U.S. residents who are currently enrolled in a high deductible healthcare insurance plan.
When you add funds to an HSA, they are not subject to federal income at the time of deposit, and the interest earned on HSA accounts is not taxed either.
HSA accounts allow you to pay for immediate health care expenses with pre-tax income as well as save for future health-related expenses.
Other types of individual savings accounts include various types of retirement accounts, such as IRA or individual retirement accounts.
There are three types of IRAs – traditional IRAs, Roth IRAs, and Rollover IRAs.
Traditional IRAs let you contribute funds and deduct those amounts on your tax return, and their growth is tax-deferred.
You can withdraw the funds from a traditional IRA once you retire and then they are taxed based on your current tax bracket, which is often lower than in retirement than it was when you were working.
Roth IRAs, on the other hand, allow you to make after-tax contributions, grow your funds tax-free, and then withdraw it tax-free upon retirement provided certain requirements are fulfilled.
Lastly, rollover IRAs let you “roll over” or move money from a qualified employer retirement plan such as a 401k into your own personal IRA account.
If you want to save for your child’s education, a 529 account is a good idea.
These individual savings accounts let you save money and grow your earnings on a tax-free basis as long as the funds are used for qualifying education expenses when they are withdrawn.
Why Do You Need Any Kind Individual Savings Account?
Having an individual savings account is important if you want to save for retirement, health care, your child’s education or virtually anything else with a tax advantage.
Talk to your accountant or a financial advisor if you want to start taking advantage of the various individual savings options.
Each type of individual savings account is designed with a different goal in mind.
Having an HSA to help offset the costs of your and your family’s healthcare is valuable in many ways, while an IRA or other type of retirement account will give you peace of mind regarding your financial future.
A 529 account or a Coverdell savings account lets you invest in your child or children’s future education.
In general, the various types of ISA accounts allow you to plan for the unexpected and save at a more robust and tax-advantageous rate than other kinds of savings accounts.
How Do You Choose the Right Type of Individual Savings Account for You?
Your accountant, bank, or sometimes even your insurance can help to advise you as to what kind of individual savings account or accounts that you need.
What’s more, your insurance plan – whether it is a group health care plan offered through your employer or another organization, or an individual plan – may have the option for an HSA account attached.
Saving for retirement is another reason to get an ISA or individual savings account. An IRA lets you deposit funds for your retirement and allows for tax-free growth as long as you don’t cash in the IRA early.
If you have children, relatives, or other dependents who may be planning on higher education in the future, there are a variety of ISA options there as well.
Coverdell or 529 accounts let you add funds and grow the earnings on a tax-free basis – and make tax-free withdrawals – as long as the funds in the account are used for qualified education expenses.
The major difference between Coverdell and 529 educational savings accounts or ESAs used to be that Coverdell accounts could be used for primary and secondary education in addition to college or university expenses, but in 2017 that was changed and now Coverdell accounts can be rolled in 529 plans.
Last but not least, keep in mind that different types of ISAs have various allowances or limits as to how much you can deposit at a time or within a given year.
For instance, in 2019 HSA accounts are limited to $3,500 for individuals and $7,000 for families, IRAs are limited to $6,000 per person, and 529 accounts are limited to $15,000 per individual in order to be considered excluded from the gift tax.
What Other Types of Accounts are Related to Individual Savings Accounts?
401k accounts, which are provided by your employer and they may offer to contribute a matching sum – and that’s a great way to build your savings and financial capital.
IRAs or individual retirement accounts are also similar, but you will receive a tax penalty if you pull the money out before your scheduled withdrawal time, and funds from your IRA are also taxed as income.
529 accounts are meant to be used for education (parents or family members often start them for their children).
Speak to an ASCO Insurance specialist to learn more about the types of ISA.