Health Savings Accounts Offer Triple Tax Advantages*

December 15, 2019

Health Savings Accounts (HSAs) help you and your family members save for future health expenses tax-free when you have a high-deductible health plan. These expenses include most medical care and services, dental and vision care.

With open enrollment around the corner for most companies, you may be trying to decide if an HSA is right for you. If you qualify, one major benefit to consider when deciding whether or not to open an HSA is its triple tax advantages.

1.) Contributions are tax deductible

According to IRS Publication 969, you can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040). Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.

2.) Contributions can be invested and grow tax-free

Unlike a Flexible Spending Account (FSA), all HSA balances carry over from year to year, allowing account holders to accumulate their savings for qualified health care needs. You can choose from many different types of investments within an HSA. In addition to low-risk, savings-type accounts, you can invest in the same type of fixed income and equity mutual funds that may be in your 401(k) or IRA.

The amount that individuals may contribute annually to their health savings accounts (HSAs) for self-only coverage is $3,500 or $7,000 for your family completely tax-free for 2019.  Texas Gulf Bank’s Health Savings Account (HSA) calculator can help you determine the amount you are allowed to contribute to your HSA account for the current tax year.  Click here to learn more.

3.) Withdrawals aren’t taxed as long as you use them for qualified medical expenses

A well-funded HSA over time can cover your healthcare costs in retirement completely tax-free.  The expenses must be primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision.  A list of these expenses is available on the IRS website, www.irs.gov.  Just type Publication 502 in the search bar and then choose “Medical and Dental Expenses” from the options shown.

If you’re healthy enough to not have many health care costs in retirement, you can withdraw the money from your HSA without penalty and use it for anything you want when you are age 65 or older. However, you will pay income taxes on withdrawals if you don’t use it for health care. If you withdraw the funds for non-qualified medical expenses before age 65, those funds will be taxed at your income tax rate plus 20% tax penalty.

*Consult your tax advisor for how an HSA might benefit you, depending on your particular tax situation.