Beyond the obvious benefits of an HSA such as, saving for unforeseen events and preparing for medical costs in retirement, HSAs have what we call a “triple tax advantage.” These unique tax advantages allow holders to maximize their health savings and lower the overall cost of medical care. Here’s how it works –
HSA holders can make tax-free HSA contributions, earn tax-free interest and investment earnings, and make tax-free withdrawals for qualified medical expenses. But, before you triple-take, let’s slow jam what that all means.
1. Tax-Free Contributions
HSA contributions are pre-taxed meaning you avoid federal income taxes and every dollar you contribute is yours. While the IRS imposes year contribution limits, any unused funds roll over year over year. The IRS contribution limits for 2020 are 3600 for individuals and 7200 for family coverage.
2. Tax-Free Growth and Investment Earning
HSA holders have the opportunity to invest their HSA funds and receive tax-free interest and investment earnings. Even with a modest return, investing HSA funds can add up over time providing a powerful financial asset.
3. Tax-Free Withdrawals
When using HSA funds for qualified medical expenses, holders enjoy tax-free spending. To avoid a penalty from the IRS, HSA funds should only be used on qualified medical expenses. HSA holders over the age of 65, however, can spend their HSA on non-qualified medical expenses and are only subject to their current income tax rate.