“What is an HSA and How is it Triple Tax Free?”

Since their inception in 2004, the interest in Health Savings Accounts (HSA’s) has surged and estimates now show roughly 25 million HSA accounts exist across the United States.  However, even with this growing interest and participation, many people are still left wondering what an HSA is and what benefits it can provide them.  In short, a HSA account is a government regulated savings account that allows you to set aside pre-tax income to cover health care expenses that are not normally covered by your insurance.  Usually, HSA’s are only available to people in a qualified high deductible health plan (HDHP) and the definition of “high deductible” varies from state to state. 

What is an HSA invested in?

An HSA provider will usually provide a suite of investment options such as mutual funds, ETF’s, and even individual stocks and bonds.  Since the account is yours personally, you have complete control over how your money is invested.  We strongly encourage our clients to have diversification across their HSA account and treat it like their other investments.  You want your account to grow, but you always want to protect against market fluctuations as much as possible.

How Much can I contribute to an HSA?

For 2019, the most you can contribute to your HSA account is $3,500 for individuals and $7,000 for families.  If you’re over 55 years old, you are allowed an additional $1,000 to play catch-up.  Assuming other investments and retirement accounts are fully contributed to, then an HSA account can be another great alternative to save with.

How are HSA’s treated for tax purposes?

This is probably the most beneficial aspect of an HSA account.  First, when you invest money into an HSA account it is tax deductible, meaning you don’t pay taxes on these funds.  Second, as the money grows inside the HSA it also avoids taxes from capital gains, dividends, etc..  Third, if you withdraw the funds inside your HSA for medical purposes it is a tax-free withdrawal!  This triple tax benefit is unheard of within the financial world and can make HSA’s a great vehicle to save for future medical expenses.  Additionally, if you end up not needing this money for medical expenses by the time you are 65 then you can pull out the funds without penalty.  You will pay taxes on those withdrawals but in that sense,  it would be treated just like your 401K or Traditional IRA account.

If you have further questions about HSA accounts or simply want to speak to a financial professional, then reach out to one of our advisors for a free introductory call!

May 24th, 2019