Exploring the Tax Advantages and Savings Potential of HSAs
By Jeremy Reif, CRPS
For those that do not know, Health Savings Accounts (HSAs) are tax-advantaged savings accounts specifically designed to help individuals save and pay for qualified medical expenses. Money that is contributed to it that was not used can be rolled forward indefinitely. HSA is not to be confused with the Flex Spending Account (FSA), which is a use-it-or-lose-it tool.
Health Savings Accounts (HSAs) have gained popularity as a financial tool that provides individuals with numerous benefits in managing their healthcare expenses, specifically for those that have a high deductible health insurance plan. We will explore why HSA accounts are a powerful tool and how they can positively impact your financial well-being.
Triple Tax Advantage
One of the primary advantages of HSA accounts is the array of tax benefits they offer. Going back to Accounting 101, this is the only item that I am aware of that is completely tax-free (if used properly). Your contributions made to an HSA are pre-tax, meaning they are deducted from your income before taxes are calculated. This lowers your taxable income and potentially reduces your overall tax liability. Secondly, any growth within the HSA, whether through interest or investments, is tax-free. Lastly, qualified withdrawals made for medical expenses are also tax-free, allowing you to keep more of your hard-earned money.
Savings and Investment Potential
HSA accounts provide individuals with an opportunity to save and invest their funds for the long term. The contribution limits for HSAs are typically higher than those of other healthcare savings accounts, allowing individuals to set aside more money for future medical expenses. In 2023 individuals’ contribution limits are $3,850 and for family plans $ 7,750. Whereas an FSA max contribution is only $3,050.
Furthermore, some HSA providers offer interest-earning options for the funds held in the account, providing the potential for growth over time. Most plans require that the money remain liquid and in an interest-bearing account (money market). Some HSA accounts allow for the money to be invested more like a traditional brokerage account, once certain plan requirements are met.
Flexibility and Control
HSAs offer a remarkable level of flexibility and control over healthcare expenses. HSAs are portable, meaning they are not tied to a specific employer. Even if you change jobs or become self-employed, you can keep your HSA and continue to contribute and utilize it for qualified medical expenses. The rule is that you must have a high deductible health plan the year you’re making your contribution.
Unlike flexible spending accounts (FSAs) that may have a “use-it-or-lose-it” provision, HSA funds roll over from year to year, allowing you to accumulate savings over time. Lastly, as the owner of the HSA, you have control over how and when to spend your funds, empowering you to make informed decisions regarding your healthcare needs.
Lower Healthcare Costs
Unless you are super-human, it is a fact of life that everyone will need medical attention at some point. Usually, people require more medical attention with age. This money can successfully help people retire early and use the open healthcare to bridge the gap to A 65 Medicare. Often this is accomplished by finding a high deductible to keep costs lower and planning that the out-of-pocket deductible is covered by their HSA account.
HSAs can help individuals reduce their healthcare costs in non-traditional ways as well. Individuals may benefit from lower monthly premiums compared to traditional health insurance plans or COBRA. Having an HSA empowers individuals to be proactive in managing their healthcare expenses. With greater financial responsibility, individuals are encouraged to shop around for the best prices, negotiate medical costs, and become more cost-conscious, ultimately leading to potential savings.
Long-Term Financial Planning
In addition to short-term benefits, HSAs can be a valuable component of long-term financial planning. HSA funds can be used to save for retirement healthcare expenses. Healthcare costs tend to increase over time with inflation. Typically more medical attention is needed as the human body fails. Having a dedicated HSA account can provide a financial safety net in retirement. Furthermore, HSAs can supplement Medicare coverage, allowing individuals to cover out-of-pocket expenses more effectively. By incorporating HSAs into long-term financial plans, individuals can better prepare for their future healthcare needs.
Health Savings Accounts (HSAs) offer a barrage of benefits. They should be utilized whenever possible. HSAs are undervalued and should be considered one of the best-kept tax secrets.