HSA Investing: The Triple Tax Advantage

This month's topic is on Health Savings Accounts (HSAs).

HSAs are one of the most tax-advantaged savings tools due to their triple tax benefits.

To have access to an HSA, you must be enrolled in a High Deductible Health Plan (HDHP):

Minimum deductible: $1,650 (single) / $3,300 (family) Maximum out-of-pocket: $8,300 (single) / $16,600 (family)

Three major tax benefits:

1.) Tax-Deductible Contributions Contributions reduce both taxable income and Adjusted Gross Income (AGI) This “above-the-line” deduction applies REGARDLESS if you itemize OR take the Standard Deduction, unlike many deductions which only help if they exceed the standard deduction.

2.) Tax-Free Growth Many don't realize that unused funds in your HSA can be invested and unused funds roll over year over year These funds grow tax-free when invested

3.) Tax-Free Withdrawals for Medical Expenses Withdrawals for qualified medical expenses are tax free at any age. You can even reimburse prior years’ expenses at any time Non-qualified withdrawals (non-medical expenses) are taxed and, if under age 65, incur a 20% penalty.

Contribution Options: Through an employer: Contributions are excluded from income and avoid both income and payroll taxes. Direct contributions: Tax-deductible, but subject to payroll tax. Note: If you have the option to contribute through your employer MAKE SURE to do so, it is not as beneficial to directly contribute to the HSA

Deadlines & Limits: Contributions are allowed up to the tax filing deadline for the previous year Annual limits are set by the IRS and adjusted for inflation. Age 55+ can make higher catch-up contributions.

Planning Tips: Pay for medical expenses out of pocket and let your HSA stay invested to grow tax free to pay for future medical expenses. If you are concerned you won't have enough future medical expenses, save all of your current medical expense receipts to reimburse yourself later. And if you still end up having too much money in the HSA and not enough medical expenses, wait until age 65 and it will operate just like another pre-tax retirement account.

Expenses reimbursed by an HSA aren’t eligible for the medical expense deduction. If your unreimbursed expenses are significant enough and exceed the AGI threshold, consider whether to deduct or reimburse for the best tax outcome.