Health Savings Accounts (HSA) are an underutilized saving vehicle for current and future health care costs. HSAs are a tax-advantaged savings account available to individuals who are part of a high-deductible health plan (HDHP). Below are key facts and just a few reasons why you should have a HSA.
- Contributions are 100% tax deductible (like an IRA or 401(k))
- Money in the plan can be invested
- Earnings grow tax-deferred (like an IRA or 401(k))
- Distributions for qualified expenses are tax-free (contributions and earnings)
- 2021 contribution limits:
- Single – $3,600/year
- Family – $7,200/year
Better Than Your 401(k)
Your 401(k) provides two tax benefits: tax-deductible contributions and tax-deferred growth. The HSA offers a triple tax break: tax-deductible contributions, tax-deferred growth, and tax-free distributions if used for qualified medical expenses. Consider maxing out your HSA annually, and don’t forget to invest the money in your plan!
Better Than Your IRA
Like the 401(k), the IRA has two tax benefits. An additional HSA benefit is how it’s taxed after 65. The funds used for qualified medical expenses are always tax-free. However, suppose you take a distribution for non-qualified expenses. In that case, the distribution will be added to taxable income and could bear an additional 20% penalty. Yet, once you turn 65, the 20% penalty goes away, and distributions are akin to IRA distributions.
Save Your Receipts
If you pay your qualified medical expenses with cash rather than your HSA, keep your receipts. You can withdraw the receipts’ total at any time, tax-free, even if it’s decades in the future.
Plan For The Future
Whether you’re in a self-only or family plan, the funds can be used for your tax dependents and spouse. Newly married but plan on having kids in the future? HSA savings can be used for those future qualified expenses. If you decide kids aren’t in your future, there is more money available to you and/or your spouse.
The biggest downside of the HSA is you have to be in a HDHP. If you are, take advantage of the benefits. If you are in a HDHP, but your employer doesn’t offer an HSA, you may be able to establish one yourself. In either scenario, work with your financial advisor and tax professional to determine if it fits into your plans.