If you have a high-deductible health plan, you may have access to one of the most powerful savings tools in the tax code: the health savings account. Often called a triple tax advantage account, an HSA lets you save for medical costs while reducing your taxes in three different ways. Many people use it only as a spending account, but with the right approach it can also become a long-term investment vehicle for retirement. Here is how it works.
Who Is Eligible?
To contribute to an HSA, you must be covered by a qualifying high-deductible health plan and not be enrolled in Medicare or claimed as a dependent on someone else’s return. Your plan documents will state whether it qualifies, so confirm before you open an account.
The First Advantage: Tax-Deductible Contributions
Money you contribute to an HSA is either deducted from your taxable income or, if it comes through payroll, excluded from it. This reduces your tax bill in the year you contribute, and contributions made by your employer are generally excluded as well.
The Second Advantage: Tax-Free Growth
Funds in an HSA can be invested in mutual funds and other options offered by your provider, and any interest or investment gains grow without being taxed. Over many years, this tax-free compounding can become significant.
The Third Advantage: Tax-Free Withdrawals
When you use HSA money for qualified medical expenses, such as deductibles, prescriptions, dental care and vision care, the withdrawals are tax-free. Keep receipts for your records in case you are ever asked to document an expense.
Contribution Limits
The government sets annual contribution limits that differ for individual and family coverage, with an additional catch-up amount for those age fifty-five and older. The limits adjust periodically, so check the current figures each year.
A Powerful Long-Term Strategy
Unlike flexible spending accounts, HSA balances roll over year after year and belong to you even if you change jobs. Some people pay current medical bills out of pocket and let their HSA invest and grow for decades, saving receipts to reimburse themselves later.
Rules After Age Sixty-Five
After age sixty-five, you can withdraw HSA funds for any purpose without a penalty, though non-medical withdrawals are taxed as ordinary income. This makes the account function much like a traditional retirement account with extra flexibility for health care.
Avoid Common Mistakes
Do not use HSA money for non-qualified expenses before age sixty-five, since those withdrawals face taxes and a penalty. Also watch for account fees, and consider moving funds to a provider with low costs and good investment options.
An HSA can be a cornerstone of both your health and retirement planning. The advisors at Finance Vista Place can help you decide how much to contribute and how to invest your balance. Contact us today to schedule a free consultation.
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