Triple tax savings
Most of us are familiar with the benefits of 401(k)s and Roth and Traditional IRAs, but few are aware of how much can be saved through the HSA structure. An HSA offers triple tax benefits, something the IRS allows for no other kind of plan: 1) contributions are “above the line” tax-deductible so you can still use the standard deduction, 2) investment gains are tax-free, 3) and qualified withdrawals are tax-free. The only catch is that to qualify you must carry high-deductible health insurance in the years that you contribute.
Must have a high-deductible insurance plan
As of 2020, your health insurance must have a deductible of at least $1,400 for an individual plan or $2,800 for a family plan, and the out-of-pocket maximum must not exceed $6,900 or $13,800, respectively. If you are also covered by Medicare, you may not contribute to an HSA. Given a choice between high and low deductible insurance plans, this is a strong incentive to choose the high-deductible plan (which, all else equal, will also be cheaper), and to cover your out-of-pocket health expenses with funds from the HSA.
Can spend on just about anything health-related
There is a generous list of qualifying expenses (see IRS publication 502) including but not limited to the following: midwives, nursing services, long-term care services, dental care, eye care, psychiatric care, non-cosmetic surgery, fertility treatments, prescription medications, lab fees, medical equipment, breast pumps, orthotics, hearing aids, reading glasses, sunscreen (SPF 15+ only), bandaids, and antibiotic ointment. Going through the list, it’s easy to see how a family can deduct thousands from their taxes each year, saving hundreds of dollars.
Can invest any unspent funds, tax-free
Unlike FSA accounts, which are meant for near-term expenses only, HSAs allow you to invest any unspent funds for future health expenses or even general retirement expenses. Withdrawals for non-health expenses prior to age 65 incur income taxes and a 20% penalty, but after age 65, the funds can be withdrawn for any reason. However, after age 65, withdrawals that are not for healthcare are subject to income taxes, as with a Traditional IRA or 401(k), so in that case you have simply beefed up your tax-advantaged retirement savings.
As of 2020, the contribution limits are $3,550 for self-only coverage and $7,100 for a family (add $1000 to these limits if you are over 55). There are no income thresholds above which you may not contribute to an HSA or deduct these expenses, nor are they affected by contributions to other tax-advantaged accounts.
Huge lifetime savings
With an HSA you can save hundreds of dollars each year on medical expenses, and potentially tens or hundreds of thousands of dollars on investment taxes and income taxes later in life when larger health expenses would otherwise come out of after-tax dollars.
Get in touch if you’d like to talk about opening an HSA.