A Health Savings Account (HSA) is an exciting planning tool that provides a unique triple tax benefit:
- Tax deductible contributions
- Tax free growth
- Tax free withdrawals for qualified medical expenses
Let's look at each of these benefits individually:
Contributions: Getting Money into your Account*
If your employer offers an HSA as part of your benefits package, then contributions can be made via pre- tax payroll deduction. If your HSA is not part of your employer plan than you can deduct your contribution on your tax return. Note, this deduction is made on your 1040 instead of your schedule A. This is one of the few deductions that remain in force after the Tax Cuts and Jobs Act eliminated itemized deductions for most tax payers.
Tax Free Growth: Growing your Account
Once you fund your account, one of two things will happen:
- You'll spend your entire contribution on qualified medical expenses over the year, while earning interest along the way, or
- Your contribution will be greater than your medical expenses, and you'll want to invest the surplus to take advantage of the tax-free growth opportunity. Assuming that the market goes up over the long term, this is where the power of compounding can have a significant impact.
Tax Free Withdrawals: Using Your Account
Withdrawals for qualified medical expenses are tax free. Please see the IRS Publication 502 for a list of qualified expenses or contact your tax professional for guidance: https://www.irs.gov/pub/irs-pdf/p502.pdf.
*Be sure to talk to your insurance professional to determine if you have a high deductible insurance plan that is HSA compatible and your financial planner to see how an HSA might have a positive impact on your plan.