Many people have heard the term “Health Savings Account” or “HSA”, but not many people know how, or why, this type of account can be so beneficial to your financial plan.
What is an HSA?
HSAs are a type of savings account that allow you to set aside money to be used on qualified medical expenses. There are a few limitations to HSAs, such as: HSAs can only be contributed to if you are enrolled in a high-deductible health plan, and annual contributions are limited to a set maximum for both self-coverage and family coverage.
However, there are a multitude of benefits that, utilized properly, can significantly outweigh the limitations. These benefits include:
- Pre-tax contributions if made to an employer-sponsored HSA – or, if you are saving into an HSA on your own, you can deduct the contributions on your tax return (even if you do not itemize your deductions);
- This means you are able to reduce your taxable income, which means lower taxes.
- Money in an HSA grows tax-free;
- Similar to a Roth IRA, you are not taxed on the growth inside an HSA.
- Withdrawals are tax-free when used to pay for qualified medical expenses.
- If you withdraw the funds for nonqualified expenses before age 65, you’ll incur a 20% penalty, plus pay income tax on the amount you take out.
- Once you are 65, you can take penalty-free distributions for any reason. But you will still be subject to income tax on the amount not used on qualified expenses.
Many HSAs allow you to invest the money in stocks and bonds, just like any other investment account. This is beneficial in helping to maximize the money in this account while also taking advantage of the tax-free growth benefit.
Summary
To summarize, HSAs allow tax-deductible contribution, tax-free growth, and tax-free distributions for qualified expenses. Thus, money going into the account and money coming out of the account is tax-free.
Who wouldn’t want a tax-free investment strategy?
If you want to learn more about HSAs and how it could impact your financial plan, this article gives you a more detailed explanation of the numerous benefits of an HSA.