Health Savings Accounts (HSA) and the Triple Tax Benefit
Last updated: 8/5/2023
If you hate paying taxes and want to save for future health care costs, then a Health Savings Account (HSA) might be your best friend. HSAs offer what's known as a triple tax benefit.
What is a Health Savings Account (HSA)? An HSA is a tax-advantaged medical savings account that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses.
What are the tax benefits? There are three major tax benefits with an HSA. 1. Your contributions to an HSA are tax-deductible. 2. Your money grows tax-deferred while in the HSA. 3. You can withdraw money from your HSA tax free as long as it's used to pay for qualified medical expenses. Wow, unless you like paying taxes, that's pretty neat.
How much can you contribute to an HSA? If your qualified HDHP is for yourself only, you can contribute up to $3850 in 2023. If your qualified HDHP is a family health insurance plan, you can contribute up to $7750 in 2023. If you are age 55 or older, you can contribute an additional $1000.
Can you even contribute to an HSA? Maybe. To be eligible to fund an HSA, you must be covered under a qualified high deductible health plan (HDHP). This is very important. So before you contribute to an HSA, make sure you are eligible to do so. Not every high deductible health plan is a QUALIFIED high deductible health plan, so make sure to confirm this. Your health insurance agent should be able to tell you if your health insurance plan is a qualified HDHP and whether or not you can contribute to an HSA. You also can't have any other health coverage or be enrolled in Medicare or be claimed as a dependent on someone else's tax return. Again, your health insurance agent should be able to help you with any HSA eligibility questions.
Where can you open an HSA account? At a bank or other financial institution. But not all banks or financial institutions offer HSA accounts, so you might have to ask around. You could ask your local bank first or maybe ask your health insurance agent for suggestions. Fees can vary, so make sure to ask about their fees too.
Can you invest your HSA contributions for long-term growth? Yes, and this is the point! If you want to maximize the tax efficiency of your HSA, you should leave your money in your HSA for the tax-free growth potential. Make sure you choose a bank or financial institution that allows you to invest your HSA contributions. Particularly, investments for growth. If it were me, I would ask if they have low-cost index funds available for their HSAs.
Think this isn’t important? Consider this. If you contribute $3850 (the 2023 max) to an HSA every year for the next 20 years and your contributions grow at 8% per year over that 20 year period, you will have approx $176,000 in your HSA in 20 years. If you have a family plan and contribute the maximum $7750 each year, you will have approx $354,000 in your HSA in 20 years (assuming the above numbers). This can all be withdrawn tax-free as long as it’s used to pay for qualified medical expenses. And there’s a good chance you’ll need it too. Last I checked, healthcare costs are rising and we’re living longer.
What happens if you change health insurance plans? No problem. If you change to a health insurance plan that is NOT a qualified high deductible health plan (HDHP), you just can’t make any additional contributions to your HSA. But any money remaining in your HSA after you change health insurance plans, can still be used to pay for qualified medical expenses now or in the future…and the money can still be withdrawn tax-free as long as it’s used to pay for qualified medical expenses.
What if you don’t use your HSA money to pay for qualified medical expenses? If you take money out of your HSA and it’s not used to pay for qualified medical expenses, the amount you withdraw will be subject to income taxes and may also be subject to an additional 20% penalty tax. There are some exceptions that may allow you to avoid the 20% penalty tax. If you become disabled, reach age 65, or die, the additional 20% penalty tax is waived.
Would an HSA be a good fit for you? An HSA is great if you can maximize your contributions each year and leave your contributions in your HSA over the long term for tax-free growth (assuming it’s used for qualified medical expenses). So you either need to be incredibly healthy with very little current health care needs OR you need to have plenty of cash on hand to pay your current health care costs out of pocket (at least up to the deductible on your health insurance plan). This way, your HSA contributions can get the full benefit of that tax-free growth (assuming it’s used for qualified medical expenses).
Want to dig in to all the details? Here's an IRS link: HSA IRS Link (Click here)
HyLine Bottom Line: An HSA may allow you to save for future health-related expenses with maximum tax efficiency. HSAs offer what's known as a triple tax benefit: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals as long as the money is used for qualified medical expenses.
What can I do at HyLine Wealth to help you with your Health Savings Account (HSA)? Not much. I use the Charles Schwab platform for my advisory business, and they do not offer HSAs. So all I can do here is pass along information to help you make your decision. This tip is on me!
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Questions? Don’t hesitate to reach out. If you have questions on anything, feel free to email me at brock@hylinewealth.com or call me at (605) 275-2343.
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Brock Hyde
Investment Adviser
brock@hylinewealth.com
HyLine Wealth
221 S Phillips Ave, Suite 207
Sioux Falls, SD 57104
Office (605) 275-2343
Location-Independent: Pretty much wherever you are located, we can work together. I am registered in the state of South Dakota and have an office in Sioux Falls. The “de minimis exemption” allows me to do business in most other states (with only a few exceptions). I consider myself "location-independent" as I use a heavy dose of technology to communicate and serve you. This includes screen sharing technology, electronic signatures when possible, and shared client portals so we can view the same information at the same time. Frankly, I can probably offer you better service than your "local" financial advisor.
HyLine Wealth is an investment advisor firm registered in the State of South Dakota. We do not provide tax or legal advice. Past performance is no guarantee of future results. Always consult your financial advisor, tax advisor, attorney, and/or insurance agent before implementing any specific strategy to make sure it is right for you and your unique situation. We are not responsible for the accuracy or upkeep of information on the links we provide to outside websites. If/when we provide a link to an outside website, be sure to independently confirm the accuracy of any information.