Health savings accounts (HSAs) were created in 2003 to incentivize individuals covered by high-deductible health plans to save for medical expenses by receiving a triple-tax advantage. Recent studies estimate that only 8% of Americans have HSAs. While HSAs have been around for several years, three out of four HSAs were established within the last five years. What gives? Given the preferential tax treatment let’s review why a HSA can be a valuable component to your financial plan.
Health Savings Account Triple-Tax Advantage
All contributions to a HSA are made on a pre-tax basis. Individuals can contribute up to $3,500 for individual coverage and $7,000 for family coverage. If contributions are made with after-tax dollars, you can deduct them from your gross income on your tax return. You are eligible to make HSA contributions as long as you have earned income, a high deductible health plan and are under 65. You can continue contributing to a HSA after 65 as long as you are not enrolled in Medicare.
The assets inside your HSA grow tax-free. Investment options offered by custodians are generally similar to what can be found by 401(k) plans once your balance reaches a minimum level. Assets left over at the end of the year automatically roll over to the next year. Assets are portable, meaning they can be moved to different firms.
Withdrawals from a HSA are tax-free as long as they are for qualified medical expenses.
To recognize the full triple tax benefit, all HSA withdrawals should be used for qualified expenses. Common qualified expenses include: prescription medications, doctor visits, dentist visits, eyeglasses, COBRA premiums, long-term care insurance premiums and Medicare premiums.
Withdrawals after 65
Don’t worry if your account balance grows larger over time. Non-qualfied HSA withdrawals made after age 65 are treated as ordinary income for tax purposes, similar to an Individual Retirement Account (IRA).
There is a 20% additional tax penalty for non-qualified withdrawals made before age 65. Do not do make this mistake!
Aetna: Full list of qualified medical expenses.
Investopedia: Retirement Uses for Your Health Savings Account (HSA)
Austin, TX CERTIFIED FINANCIAL PLANNER™
Still have questions regarding if you qualify for the triple-tax advantage of a Health Savings Account to improve your tax planning strategy and unique financial plan? Meet with a CERTIFIED FINANCIAL PLANNER™ in Austin, TX or online.