Health Savings Accounts

Health Savings Accounts

February 12, 2024

Almost anyone who has spoken with me on financial planning has heard me express how much I love Health Savings Accounts (HSAs). In my opinion HSAs are an underrated and underutilized tool that can provide numerous benefits when used properly. In order to contribute to an HSA, a person much be utilizing an eligible high deductible health care plan.

The reason that these accounts are so great is that an HSA is currently the only tool that gives the user “triple tax benefits”. The first of these benefits is in the contribution. An eligible individual (or family) can make a tax-deductible contribution to the HSA account each year. The second tax benefit is in the lessor known ability of being able to invest those contributions. In addition to being able to invest the money, the growth on that investment is not taxed in the year the gains are realized. Finally, the third tax benefit of an HSA is that there are no taxes owed on that withdrawal of the funds as long as the funds are spent on eligible healthcare expenses. The HSA gives the owner the ability to save, invest and spend and never owe taxes on these funds so long as the rules are followed. This is a powerful tool when used correctly that is unmatched by any other account or planning method. The best way to utilize an HSA is to contribute, invest, and let the funds grow over a long period of time. Pay for your current healthcare expenses out of pocket and use the HSA funds in your later years after the money has had a chance to grow tax free.

Because of these benefits, I frequently recommend that people utilize an HSA as much as possible. If you are able to contribute to an HSA, I believe it can be extremely beneficial to think of it as a pseudo-retirement account. Contribute, invest and plan to spend the money in the future. Lastly, please note that although you are no longer allowed to contribute to an HSA once you are enrolled in Medicare, you are able to use HSA assets to pay Medicare premiums.

For additional tax related questions, please consult your tax professional regarding your specific situation.