What is the Tax Benefit of a Health Savings Account (HSA)?

While most people know about the tax advantages of 401(k)s, IRAs, and 403(b)s, few pause to consider the massive tax benefits of an HSA when choosing a health insurance plan by signing up for a high deductible health plan that qualifies for an HSA, a tax payer can save thousands of dollars on taxes over the course of their lifetime.

What are the Tax Benefits of an HSA?

HSAs offer several tax advantages that benefit taxpayers immediately and in retirement. Some of these benefits include:

• Tax deductions - funds contributed each year that are under the contribution are not taxed. You don't need to spend the funds; they just need to be deposited into your HSA account.
• Penalty-free access to your money - you can use the money that you've set aside in your HSA for any qualified medical expense penalty and tax-free. This allows you to save money in your HSA with the confidence that you'll have access to it when it's needed.
• Tax-free investment growth - After you accrue $1,000 in your HSA account, you can begin investing funds. Gains on these investments are tax-free as long as they are used for qualified medical expenses.
• Unrestricted access to your funds after the age of 65 - Once you turn 65, you are able to use the funds in your HSA for any purpose without penalty. The only drawback is that any funds used for unqualified health expenses are still subject to income tax.

Saving money in an HSA is an excellent option if you can afford to pay more for out-of-pocket health care costs. The only time that an HSA becomes a liability is if you start needing to take funds out for unqualified expenses and are assessed the 20% penalty.

How Do HSAs Work?

An HSA is a health savings account that allows you to contribute money towards eligible medical expenses without having to pay taxes on those contributions. In addition, any funds not used can be carried from year to year and eventually invested for tax-free gains.

Which Health Insurance Plans Qualify for an HSA?

For an insurance plan to qualify for an HSA, it must be considered a high deductible health plan (HDHP). According to the U.S. Centers for Medicare and Medicaid Services, In 2022, a plan with a minimum deductible of $1,400 or more for an individual and $2,800 or more for a family qualifies as an HDHP. The qualifying deductions can change year-to-year.

How Much Can I Save in an HSA?

The HSA contribution limit and qualifications for an HDHP plan can be found on the HSA's website.

In 2022, you can contribute up to $3,650 for a single plan and $7,300 for a family plan. However, if you are 55 or older, you may save an additional $1,000 per year.

If you are enrolled in an employer-sponsored plan, your employer will automatically deduct the funds from your paycheck, and your tax benefits will apply from paycheck to paycheck.

If you have an HSA of your own (meaning you are self-employed or don't have health insurance through work), you must complete form 8889 and include it when submitting your form 1040 to claim a tax deduction on contributed funds.

Which Expenses Count as Qualified?

HSA funds are required to be used on qualified medical expenses for the money to be completely tax-free. The list of qualifying expenses is quite extensive and can even include things like toothpaste, eyewear, or even service animals. For a complete list of allowable expenses, check out IRS Publication 502.

Do I Need to Spend All Contributed HSA Funds in a Given Year?

Unlike some FSAs, HSA funds never expire. The funds continue to roll over annually as long as they remain in your account.

Once you've saved at least $1,000 in your HSA account, you can even start investing the funds and benefit from tax-free gains.

How Do I Ensure That I'm Getting All of The HSA Tax Benefits Available to Me?

Want to make sure you are taking full advantage of the HSA tax benefits available to you? Maybe you're wondering if an expense qualifies as reimbursable through your HSA. Contact us to get all of your questions regarding HSA tax advantages today!