HSA Triple Tax Advantages - SmartAsset

A health savings account (HSA) offers a unique opportunity to build your investments. The triple tax advantages found through this account make it worthwhile to consider. Here’s what you need to know about the HSA triple tax advantage.

A financial advisor could help you create a financial plan for your investment needs and goals.

What Is an HSA?

An HSA is a health savings account designed to help you pay for medical costs. You generally can’t use these funds to cover health insurance premiums. But those savings can cover most other medical-related expenses, including copayments, deductibles, and more.

To open an HSA, you’ll need to have a high deductible health plan (HDHP). Typically, HDHPs only cover a minimal amount of health costs before you meet your deductible.

If you can contribute to an HSA, you may be able to open one through your employer. If not, many financial institutions offer this type of account.

For those that open an HSA, the maximum contribution limits for 2022 are $3,650 for an individual account or $7,300 for a family account. If you are over $1,000, you can contribute an extra $1,000 per year.

HSA Triple Tax Advantage

Now that you know a bit about the basics of an HSA let’s dive into the unique advantages. Here’s a closer look at the HSA triple tax advantage.

Tax-free contributions. The first tax advantage you’ll encounter through your HSA is that your contributions can be made tax-free. You might already be familiar with this type of tax advantage if you contribute to a 401(k) or traditional IRA.

Essentially, the funds you contribute to an HSA will be deducted from your taxable income for the year.

For example, let’s say that you earned $50,000 in 2022. But you contribute $3,500 to your HSA. With that, your taxable income for the year would be lowered to $46,500.

A lower taxable income means a lower tax liability. So, tucking funds away into this account means your tax burden will be lower.

Tax-free growth. Next up, the funds you tuck into your HSA will be allowed to grow tax-free. Any investment growth or accumulated interest on your balance will be tax-free.

Depending on your investment strategy and your contributions, this tax-free growth could dramatically impact the balance of your HSA. Plus, there are no required minimum distributions each year.

With that, you can grow your HSA account every year. Of course, if you run into a medical issue, the account balance will take a hit. But that’s what it’s there for! An HSA should be there to tap into when you have healthcare-related expenses to cover.

Tax-free distributions. The last piece of the HSA triple tax advantage is that the account comes with tax-free distributions. That’s right! You won’t have to pay taxes on these funds when you pull them out for qualified medical expenses.

Qualified medical expenses include things like copays and prescriptions. If you run into these expenses, you can withdraw the funds tax-free. But if you are over the age of 65, you can pull out the funds tax-free with or without a qualified medical expense.

Ultimately, this final tax advantage gives HSA the trifecta. You won’t have to pay taxes on funds you contribute, the growth of those funds, or the funds you withdraw from this account.

Is an HSA a Good Fit for You?

The HSA triple tax advantage is undeniably attractive. It’s possible the most tax-advantaged way to grow your savings. But there is a catch, you can only contribute to an HSA if you have a high deductible health plan.

With an HDHP, you’ll be facing a higher annual deductible. So, if you have extensive medical expenses, then an HDHP might not be a good option for you. And therefore, you wouldn’t have access to an HSA.

But if you are comfortable with an HDHP, then an HSA is a no-brainer. That’s especially true because HDHPs are often more affordable than a traditional healthcare plan with a lower deductible. If possible, tuck any savings you tap into from making the switch to an HDHP into your HSA.

Not sure if an HSA is right for you? A qualified financial advisor can help you decide.

Bottom Line

An HSA offers savers the opportunity to set aside funds specifically for healthcare. The HSA triple tax advantage can help you make the most of your savings. And throughout your life, you can tap into these funds anytime a medical emergency arises.

Tips on HSAs

A financial advisor could help you figure out how to add an HSA to your retirement plan. That’s when working with a qualified financial advisor could be the right option. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you choose to invest in mutual funds or other stocks through your HSA, keep an eye on the fees. You don’t want fees to eat away at your HSA’s growth potential.