HSAs Pack a Triple-Tax-Savings You Don’t Want to Miss
You might already understand the basics of a Health Savings Account (HSA), that it is an individually owned account that allows you to save for eligible medical expenses. But, your HSA can help you financially in more ways than you might have realized. Did you know that your HSA can be used as an investment tool? Or, that contributions and withdrawals can be tax free under certain circumstances? Let’s explore how an HSA’s triple tax benefit can help you both now and into the future.
1st Tax Benefit: Contributions Are Tax-Free
One benefit of using an HSA is that the money you choose to put into your account goes in tax free for federal income tax purposes. Contributions are typically made with pre-tax dollars through payroll deductions, so they are not included in your taxable income when you file your federal return, although state law may require you to include them for state income tax purposes.1 If you choose to make contributions with after-tax dollars, you can deduct that money from your income on your federal tax return.2* This means you can reduce your federal income tax for the next year! It’s also important to note that the contributions to your HSA are available to you whenever you need them; there is no “use or lose” rule like with Healthcare Flexible Spending Accounts. You will never have to worry about losing your contributions because your unused funds will always roll over into the next year. Read on about contributions and tax savings:
- How much should you contribute to your HSA?
- How much do you actually save with reimbursement accounts?
2nd Tax Benefit: Investment Growth is Tax-Free
Did you know that HSAs are one of the only accounts that provide tax-free distribution of account growth on your investments? HSA providers often allow investment in various mutual funds once your account hits a required minimum balance. Choosing to invest in your HSA can help increase not only your tax-free growth, but also your retirement savings. Learn more about how you can invest your HSA funds.
3rd Tax Benefit: Withdrawals for Eligible Medical Expenses are Tax-Free
You now know that putting money into your HSA is tax free. Taking out money from your HSA follows the same principle! Any withdrawals from your HSA for eligible medical expenses are tax free. For example, say you withdraw $100 to pay for an eligible expense. You will receive the full $100 and, as long as it is an eligible expense, you will not pay tax on the withdrawal.
Bonus: Your HSA is Also a Regular Retirement Account
Your HSA is always helping you prepare for the future and the unexpected, including helping you prepare for retirement. A great bonus of your HSA is that it can be used as a regular retirement account. Before the age of 65, you are required to pay a penalty for withdrawals for non-eligible expenses, in addition to applicable income taxes. Once you reach the age of 65, you can withdraw funds from your HSA for non-medical purposes without facing the 20% penalty fee, but you will have to pay income tax on the withdrawals. This allows you to use your funds for your various retirement needs. For example, let’s say you want to pay a beach house deposit with your funds after the age of 65. You are good to go! You can start withdrawing for any reason and pay normal income taxes with no penalty. Learn more about how your HSA can help you prepare for retirement.
Are you wanting to lessen the stress you may feel when it comes to medical expenses? The triple-tax benefit provided by a Health Savings Account can make it a great financial resource for you now and into the future.
This blog is up to date as of June 2021 and has not been updated for changes in the law, administration or current events.
Shop for Eligible Items on the HSA Store
You may purchase HSA-eligible items online at the HSA Store. Browse medical supplies, over-the-counter medication, prescriptions, and more.