What’s an HSA? And why should I care?

Would you like a Triple-Tax-Benefit? …I thought so. Behold the glory that is the Health Savings Account, (HSA). 

An HSA saves you taxes when you put money in, doesn’t get taxed every year while its growing, and is not taxed when you spend the money (on the right things). We call it the Triple-Tax Benefit, and it can be a game-changer in your financial plans.  If you want to know why an HSA is such a good idea, stick around. This post is just for you.  

First, some context:  HSAs were established in 2003 to help people save money for their health care, but not everyone can open one.  

Are you eligible? Broadly speaking, if you are covered by a high-deductible healthcare plan (HDHP) you can open and contribute to an HSA. An individual covered by an HDHP can contribute $3,600 per year to an HSA.  Families covered by an HDHP can contribute up to $7,200 per year.  Individuals 55 and older can contribute an additional $1,000 per year.  Married couples over 55 can each contribute the additional $1,000, above the $7,200 cap into two separate HSA’s, for a total HSA contribution of $9,200.  Contributions are tax-deductible. Any interest earned in the HSA is tax-free. If you spend the HSA money for qualified healthcare costs, the withdrawals are tax free too.  That’s a triple-tax-benefit, a very unusual bargain from the IRS. If you want more details about eligibility, rules & definitions, read up here: https://www.irs.gov/publications/p969.   

So why could this be a big deal for you?  

• Tax-free distributions in retirement so you don’t bump up your tax bracket when unexpected healthcare costs arise.  If you pay for healthcare costs with IRA distributions, you’re taxed on those distributions and run the risk of pushing your income into a higher tax bracket.  Savings inside an HSA gives you better options 
• HSAs will reduce your taxes in ways other savings plans can’t: Compare the HSA to its better-known savings account cousins: IRA’s and Roth IRA’s.  While IRA contributions are tax-deductible and grow tax-deferred, the distributions are taxable as income. A Roth IRA is essentially a tax-free pool of money, but you don’t get a deduction for contributing.  HSA’s are a big deal because they give you the best of both worlds for your health cost planning.   
• An HSA can help you plan for higher healthcare costs in the future.  When you retire, healthcare will be one of your biggest expenses. The costs continue to balloon. You can use the HSA to cover your costs in retirement- including Medicare premiums, essentially making them tax-deductible. If you’re making good money, you can reduce your tax burden while pre-funding your medical costs down the road.  

So- if HSA’s are so great (again, the Triple-Tax Benefit, can’t stress this enough) why don’t more financial advisors talk about them? There are several reasons, namely:  

• Because the finance industry is SLOOOOOOW to innovate.  There are more options available each year, but shockingly few for an idea that has been around for 18 years.   
• HSAs aren’t a profit center for most advisors.  The simple truth? It is difficult for most advisors to set up an HSA and charge an internal commission or fee, so they aren’t as likely to bring them up.  

Think an HSA might be for you?  Talk to a financial advisor working in your best interest and consult a tax professional.  Thanks for reading!