3 Tax Benefits of Using an HSA

Brett Pittsenbargar - HSA Benefits

While people tend to be more familiar with the tax advantages of investments such as IRAs or a 401(k), the Health Savings Account, or HSA, is not as well known and is talked about less in the investment community.

However, there are three tax benefits that come with using an HSA that you should be aware of when determining the right investments for you.

Understanding the HSA

An HSA allows you to set aside money for current and future health care costs. Qualified expenses include almost all services that are provided by a healthcare professional. Some of these expenses include:

  • Doctor bills
  • Hospital bills
  • Diagnostic devices
  • Acupuncture
  • Prescriptions
  • Substance-abuse treatment

In addition, there are no limits on the amount of money you can carry over from year to year, so you can allow your HSA to grow over time. Regardless of who sponsors the program, you own funds in the HSA.

Tax Advantages of an HSA

There are three main tax advantages of an HSA. What’s nice about these advantages is that when they are combined, they make an HSA one of the best savings vehicles for retirement.

The tax advantages are as follows.

1. Contributions are tax-deductible or are pretax

If you make your deductions through your payroll at work, then all of your deductions are pretax which means you won’t have to include them in your state and federal income tax reports.

On the other hand, if you are making contributions directly to your HSA, your deductions can be deducted from your income tax reports.

2. No tax on earned interest

Because you can allow your contributions to remain in your HSA from year to year, if you don’t use them, they will earn interest. This interest is tax-free.

3. Qualified withdrawals are tax-free

If you withdraw money from your HSA to pay for qualified medical expenses, those withdrawals are tax-free. It doesn’t matter your age or how long the money has been in the account.

Additional Information You Should Know About an HSA

While the tax benefits make an HSA a great savings opportunity, there are limits on the amount you can invest each year. If you are under 55 years of age, you can contribute up to $3,350 for an individual and up to $6,750 for a family. Once you are 55 or older, you can add an additional $1,000 per year. This is called a catch-up contribution.

If you take money out of your HSA for reasons other than medical expenses, there is a 20 percent penalty if you are under the age of 65. However, once you are 65 there is no penalty for distributions, but distributions that are not for qualified expenses would no longer be tax-free.

Finally, to be qualified to open an HSA, you must have a healthcare plan with a high deductible. That means a healthcare plan with deductibles and out-of-pocket expenses of at least $1,300 for an individual and $2,600 for a family.

If you are looking for an savings vehicle, you should look closely at a Health Savings Account. It is the only savings option available with such preferential tax treatment by the IRS. With the three major tax advantages it comes with, and the fact you can allow your investment to grow over the years, there is really no better way to set aside money for health expenses later in life.

If you’d like to learn more about how an HSA would fit into your investment portfolio, contact BP Financial today.


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