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The 3 Tax Benefits of Health Savings Accounts (HSAs)

The-3-Tax-Benefits-of-Health-Savings-Accounts

If you’re enrolled in a qualifying high-deductible health insurance plan, consider investing in a health savings account (HSA). The IRS defines a “high-deductible insurance plan” annually, and you can see the current definition here on Healthcare.gov. As of this writing in 2021, high monthly deductibles are defined as at least $1,400 for an individual or $2,800 for a family. Keep in mind, however, that not all high-deductible insurance plans qualify you for an HSA. These investment vehicles can be helpful financially, and there are three notable tax benefits of health savings accounts.

It’s important to say that HSAs are not ideal for everyone. Speak with an experienced financial adviser for personalized guidance on whether investing in a health savings account makes sense for your financial situation and goals.

What Are Health Savings Accounts?

In case you’re not familiar with them, HSAs are special savings accounts specifically designed for use on qualified medical expenses. They cover a wide spectrum of health-related costs, while some main exclusions include insurance premiums, over-the-counter drugs, and cosmetic procedures; they can however typically be applied to deductibles, co-pays, and coinsurance payments.

HSAs help you prepare financially for potentially burdensome medical expenses (even with insurance coverage) in the event of a serious illness or injury, the need for surgery, and so on.

How Do HSAs Work?

Like with IRAs and 401(k)s, there are annual contribution limits to health savings accounts. As of this writing in 2021, those limits are $3,600 for individuals and $7,200 for families. The limits increase every year, and people over the age of 55 can contribute an additional $1,000 per year over the limit.

Some employers who offer high-deductible insurance plans also offer HSAs, or they may be acquired separately. You receive a debit card and/or checks that you use to apply funds in your HSA to qualified medical expenses not covered by your insurance plan.

The money in your HSA can be invested in mutual funds, stocks, ETFs, and a variety of other investment vehicles.

Health savings account balances roll over from year to year (unlike alternatives such as flexible spending accounts). And once you make contributions while eligible, you can maintain and continue using funds from your HSA even after you no longer have a qualifying health insurance plan. These accounts can also be passed on to heirs.

And, as mentioned, there are significant tax benefits of health savings accounts. Once you’ve maxed out your 401(k) and your IRA, an HSA is the next best tax-free savings vehicle.

Tax Benefits of Health Savings Accounts

In addition to helping plan for medical expenses, the three tax benefits of health savings accounts are one of their most appealing aspects to many people focused on financial planning. These benefits are:

  • HSAs reduce your taxable income. Contributions are either pre-tax if your account is through your employer, or tax deductible if you opened one on your own
  • Money earned through the accounts growth is not taxed
  • As long as your withdrawals are applied toward eligible expenses, they aren’t taxed either

HSAs are the only accounts that do not tax contributions, earnings, or withdrawals.

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