For most people, saving on health insurance is a top priority. High-deductible health plans could be a path to lower monthly premiums. The problem is, you’re stuck paying more until your deductible is met. If you see the doctor often or fill a lot of prescriptions, bills may be higher than you expect.
Opening a health savings account or HSA is one way to fight back. They offer three different ways to save on taxes — putting money back into your pocket. Here’s how the seize this triple-tax win for you or your family.
#1 – Contribute to your health savings account before taxes.
There’s a lot to like about contributing before taxes to your HSA. If your employer diverts part of your paycheck into an HSA, the money is no longer part of your taxable income. Let’s say your salary is $45,000 per year, and $3,500 goes into your HSA. Your $3,500 contribution is removed from your income completely, reflected on your W-2 at tax time.
Contributing after taxes is a pretty good deal too. You’ll need to report your contribution on Form 8889 and you can take a tax deduction for that amount. Either way, your 2019 limit it the same — $3,500 alone or $7,000 as a family — and in both scenarios, you’ll save money.
B because of the tax savings, it’s almost like you’re getting a discount on every health expense you pay for. Unless you’re planning to spend nothing on healthcare, contributing to your HSA is a no-brainer.
#2 – Money in your health savings account grows tax free.
One of the unique things about your HSA is portability. You don’t have to give it up when you change jobs. An HSA is your for life. Unlike flexible spending arrangements (FSAs), there is no “use it or lose it” rule. As you can imagine, this makes it easier to save throughout your career.
Some HSAs allow you to invest the balance, and your earnings grow tax-free. After many years of saving and investing, you could amass a sizable chunk of change. A few minutes with our HSA calculator may surprise you. If you start with nothing and add $3,500 per year, you could end up with nearly $275,000 in 30 years and over $25,000 in tax savings. (This assumes no withdrawals, 6% rate of return, and a 25% blended tax rate.) Please note HSA growth is not guaranteed, please contact an investment or tax professional when considering HSA investments.
As you can see, your HSA is kind of like another Roth IRA for health expenses, and let’s face it — it only gets more expensive with age. With healthcare averaging nearly $275,000 for the average couple, your HSA savings will be put to good use.
#3 – Your withdrawals are tax-free for qualified medical expenses — anytime!
When it comes to 401(k) contributions, owing taxes on withdrawals is a drag. Waiting until retirement to access the money is difficult enough. Being slapped with a tax bill only makes matters worse. Luckily, that’s not the case with your HSA. As long as you’re paying for qualified medical expenses, you can spend the money anytime. Best of all, you won’t owe another dime in taxes.
No matter how you slice it, your HSA equals tax savings.Most of us would prefer forking less of our hard-earned dollars over to the government. Other than making less money, you either need to reduce your taxable income or take more deductions. Your health savings account may be the only time you’ll save on taxes three separate times. You can start by reducing your taxable income or taking a deduction. The balance grows tax-free. When you’re ready to withdraw the money, you won’t owe taxes. Triple-win!
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.