The Triple Tax Advantage of Health Savings Accounts (HSA)
Today I want to discuss the “triple tax advantage” offered by Health Savings Accounts (HSA). Health Savings Accounts are tax-advantaged medical savings accounts. Similar to retirement accounts, HSAs offer both a savings vehicle for future expenditures as well as some nice tax advantages.
Here are the three tax advantages you get with an HSA:
1) Money deposited is on a pre-tax basis
Similar to how funds are deposited into a 401(k) account on a pre-tax basis, HSA funds are also deposited on a pre-tax basis.
2) Funds may be used for qualified medical expenses without tax liability
Not only are funds in an HSA pre-tax, they also can be used at any time for qualified medical expenses without a tax liability. This is a huge tax advantage, as people who do not have an HSA account are paying for similar medical costs on an after-tax basis.
3) Investment income is not taxed
Let’s say you deposit $3,000 a year for three years to your HSA Account. If you only end up using $1,000 of that $9,000 accumulated, you would have $8,000 left sitting in the account. With an HSA, you can invest that money similar to a retirement account. The gain you make on this investment is not taxed as long as you use the funds for qualified medical expenses. If this account was built up over a long enough time frame, you can very easily have a large asset on your hands.
A couple notes about HSA Accounts:
- In 2012 an individual can contribute up to $3,100 to an HSA. The family limit is $6,250.
- Funds in an HSA roll over year-after-year, so you don’t have to use up the balance in the account each year. On the contrary, it’s a good idea to try to build up the balance over time.
A major drawback of the HSA is that they are high deductible. For example, you may have to pay the first $3,000 out of pocket before the insurance company starts paying the brunt of your medical costs. While this is a disadvantage, if you build up your HSA funds you won’t feel the pain (as much) and have a safety net in place for medical costs.
For someone like me who has a few medical issues that can creep up at any time (asthma, allergies, sinus issues, etc.) I find comfort in having an account that is designated for medical costs. When you combine that with the fact there are some big tax savings from an HSA, I definitely think an HSA is something everyone should consider using.
Do you have an HSA? If not, what insurance plan do you use? Would you consider switching to an HSA?
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