Occasionally, the government provides an incredibly useful tool for investors allowing them to save money for the future and save on taxes. One such tool is a Health Savings Account (HSA). These are tax-advantaged savings accounts for qualified health care costs, which also have a unique triple tax benefit.
To be eligible for an HSA, you must be enrolled in a high-deductible health care plan with a deductible of at least $1,400 for an individual or $2,800 for a family. Many company-provided health insurance plans are moving to this structure. Affordable Care Act health care plans will specifically state whether it can be used with an HSA. Furthermore, there are no income limits to be eligible to contribute to an HSA. Contributions are also 100% deductible at all income levels.
If your health care coverage is through your employer, your employer may also offer you access to an HSA; however, you can also access one through a bank or other HSA provider. Generally, your HSA contribution is deducted from your paycheck pre-tax, thus lowering your taxable income for the year. Contribution limits for 2022 are $3,650 for an individual and $7,300 for family coverage. Those 55 and older may also make catch-up contributions of $1,000 per year.
The money saved to an HSA is yours, so even if you change employers or insurance plans, your HSA dollars remain with you. You may use HSA dollars any time to pay for qualified medical costs. Unlike Flexible Spending Accounts, money in an HSA rolls over year to year. The list of eligible expenses includes but is not limited to doctor visit copays, mental health and addiction treatment, dental and vision care, alternative health care treatments like acupuncture or chiropractic services, fertility treatments, smoking cessation programs, service animals, and long-term care premiums, plus a wide range of health care products. You may also pay for any medical expenses incurred by your spouse or your children—who don’t have to be on your health insurance plan. Since the money was saved to the HSA pre-tax, you are essentially paying for health care expenses with pre-tax dollars.
One of the unique features of these plans is that the accumulated money can be invested, which may allow you to leverage the amount you are setting aside for potential health care expenses. If, as a result, your money grows, you receive tax-free growth on those earnings, causing it to compound more quickly than if you invested those dollars after paying taxes. Earnings and interest earned by your contributions may be used tax-free to pay for eligible health care expenses.
Since it is your money, you may withdraw from your HSA for non-health care reasons; however, you will generally owe income tax and a 20% penalty if you are younger than age 65. While the HSA is not intended to be a retirement account vehicle, funds grow tax-deferred, like a Roth IRA. After age 65, only income tax is due on non-health care withdrawals.
Overall, HSA contributions reduce your taxable income today, investment growth in the account is tax-free, and qualified medical expense withdrawals are also tax free.
If you have questions on how a health savings account may work for your financial situation, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the March 19, 2022 “Henssler Money Talks” episode.
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