The Health Savings Account (HSA) is a great savings vehicle that can be used to fund your healthcare costs and save tax dollars along the way. Unfortunately, there are still millions of people that do not take advantage of an HSA, even if they are eligible to open an account. Furthermore, according to a 2016 report by the Employee Benefit Research Institute, individuals with HSAs had an average balance of just $2,922.
A Health Savings Account is a tax-advantaged medical savings account available to taxpayers who are enrolled in a “High-Deductible Health Plan (HDHP)”. The IRS places a limitation on the amount that a taxpayer can contribute to their HSA . The contribution and HDHP limits for 2019 and 2020 can be found in the table below.
|Annual HSA Contribution Limit|
(employer & employee)
|HSA Catch-Up Contributions |
(age 55 & older)
|Minimum Annual HDHP Deductible||Self-only: $1,400|
|Maximum Out-of-Pocket for HDHP|
(deductibles, co-payment &
other amounts except premiums)
Why Contribute to an HSA?
HSA Benefit #1: Triple Tax Advantage
The “Triple Tax Advantage” is a term that is often used to describe why an HSA is so tax-friendly. These 3 advantages are outlined below:
- First Tax Advantage: The money that is contributed to an HSA is tax-deductible as an above the line deduction. If your HSA account is through your employer, then it will reported on your W-2 as a reduction of box 1 wages.
- Second Tax Advantage: The assets in your HSA account typically grow tax-free. Furthermore, depending on your HSA provider, you can invest in mutual funds, stocks, or other investments of your choosing.
- Third Tax Advantage: The funds can be withdrawn without being taxed and at any age, if they are used for qualified medical expenses (for you, your spouse, or your dependents). Qualified medical expenses are certain healthcare expenses designated by the IRS and are generally the same as those defined in Publication 502.
HSA Benefit #2: An HSA Can be an Awesome Supplement to Retirement
Once you reach age 65, an HSA can essentially be used as a traditional 401(k) because any withdrawals from the account, regardless of what they’re used for, are not subject to penalties. Furthermore, if the funds withdrawn are used for qualified medical expenses, they are tax-free.
|Traditional 401(k) or IRA||Health Savings Account||Which Account is More Tax Efficient?|
|Withdrawals used for qualified medical expenses||Taxable||Tax-Free||HSA|
|Withdrawals not used for qualified medical expenses - over the age of 65||Taxable and not subject to penalties||Taxable and not subject to penalties||Equal|
|Minimum Distributions||Required at age 70.5||Not Required||HSA|
HSA Benefit #3: Funds can be Used in Any Year
Unlike a Flexible Spending Account (FSA), the funds you contribute to your HSA do not need to be used in the same year that you contribute to your HSA account. This means that you can accumulate multiple years of savings and growth in the account without the worry of having to spend the money every year.
HSA Benefit #4: No Income Limitation
The IRS does not subject taxpayers to certain discretionary income limitations for HSAs, so you can contribute to an HSA regardless of how much money you make.
All eligible taxpayers should consider taking advantage of a health savings account. Not only to fund healthcare costs, but also as an effective retirement savings vehicle. Do you think it makes sense for you to start an HSA? Our team of tax and financial planning professionals can help you make this decision, as well as help answer any other questions you may have regarding your financial situation.