Keeping more of the money you earn has to be at the top of any long-term savings or investment strategy. The tools to limit your tax-liabilities are long and complex, but with some investigation, they can change your savings forecast.
Healthcare might not be the most obvious place to start when adding a new tax-free savings or investment account. That’s why you need to understand the HSA (health savings account).
An HSA (Health Savings Account) is a personal health savings account. HSAs are owned by individuals (not employers). You can take them with you from job to job and transfer to new providers. You have your HSA for life!
HSAs enable triple tax-benefits. These include tax-deductible contributions, tax-free interest and tax-free withdrawals (when usedfor medical expenses). In 2019, individuals can contribute $3,500 and families can contribute $7,000.
HSAs work with HSA-eligible health plans, like HDHPs to help you save tax-free money for all of your expected and unexpected health costs. We explore HSA tax-benefits in more details below.
HSA Tax-Free Contributions
HSAs allow for 100% tax-free contributions regardless of income level. Anyone can contribute to your HSA. You, your employer, your family, even a long-lost friend. As long as your total yearly contributions don’t exceed the limits set by the IRS, you can let anyone contribute to your health savings!
HSA Tax-Free Growth
You can also invest your HSA funds tax-free. Using HSA investments or guaranteed interest youcan increase the value of your initial HSA savings (note: investments carry risk).
Balancing HSA spending with HSA investing creates more opportunities to enhance your initial tax-savings and prepare for expected or unexpected medical costs.
HSA Tax-Free Distributions
Once you have saved or invested your HSA funds, you can use them tax-free, as long as they are for qualified out-of-pocket medical expenses. This is effectively a 25% savings (assumes blended federal and state income taxes of 25% or more) on your health-related purchases.
While HSA contributions require an HSA-eligible health plan, HSA spending does not. Once you save HSA funds, you can use them regardless of your health plan selection, as long as you continue to adhere to the HSA IRS spending guidelines.
As a cherry on top of this already unprecedented tax savings, after the age of 65, you can use your HSA funds, just like a 401(k) or IRA. Spend them on anything! HSAs do not require mandatory distributions, so you can keep your HSA investments intact, or move them, based on your personal preferences, not IRS guidelines. What a wonderful perk.
Using your HSA to save, invest and spend 100% tax-free for medical expenses creates a clear tax haven. It limits the yearly cost increases of medical expenses. There are no other savings options like this on the market. If you don’t spend your tax-free HSA funds for medical expenses, they effectively become another retirement account. Maybe an HSA is the new stealth 401(k)?