The Triple Tax Advantage of Health Savings Accounts (HSA)
Today I want to discuss the “triple tax advantage” offered by Health Savings Accounts (HSA). With most of the key provisions of the ACA effective Jan. 1, 2014. 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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