By Marc C. Shaffer
A triple tax-advantaged account that many overlook, a Health Savings Account (HSA) is an account for individuals with high deductibles to set aside money on a pre-tax basis to cover qualified medical expenses. If you are able to cover most medical expenses out of pocket, a high deductible health insurance plan may work for you while allowing you to invest through your HSA for tax-free growth.*
According to a survey by the Plan Sponsor Council of America, only 18.7% of HSA participants are investing their assets. The rest seem to leave cash sitting in their accounts, barely accumulating enough to keep up with inflation.
An HSA can be a good investment vehicle for several reasons. Contributions are tax-deductible, the funds can grow tax-free and withdrawals for qualified medical expenses are tax-free.
By utilizing an HSA account that allows you to invest your contributions, you have the potential to grow those funds over time. HSA funds can be saved and used to cover future medical costs (think during retirement) just make sure to keep your receipts to ensure that the withdrawal is tax-free when you reimburse yourself in the future. You do not have to withdraw the funds as soon as you spend them, so saving your receipts and adding them up over the years can lead to a large tax-free withdrawal in the future.
You might store up the account over time to cover things such as extended care. HSA funds can cover items such as in-home and out-of-home nursing services for medical related reasons, or home modifications, wheelchairs and walkers, and even service animals.
Curious what other common expenses are claimed against HSA accounts? Check out this resource.
So how much can you invest and what can be the tax advantage of saving in this account? For the 2024 tax year, you can contribute $4,150 as an individual or $8,300 as a family. If you are 55 or older, you can add an additional $1,000 as a catch-up contribution. Additionally, every dollar you contribute to your HSA reduces your taxable income by one dollar.
Does your high income disqualify you from investing in other tax-favored accounts? Another great feature of the HSA is that there are no income limits like there are with a Roth IRA, a type of account that offers similar tax-free growth.
Many individuals have large amounts of funds saved for the future wrapped up in tax-deferred accounts. Worried about taking a withdrawal for non-medical expenses that might require penalties or push you into a higher tax bracket (when the withdrawal is counted as income)? Another advantage of an HSA account is using the funds when you need, and to your advantage. If you need funds in a given year for a non-medical expense, consider letting your HSA funds cover all qualified medical related needs that year so your general cash flow is available to cover the other expense. Or reimburse some of your saved medical receipts from the past to free up the needed funds without impacting your underlying tax liability. These reimbursements would not show as “income” and shouldn’t impact your tax bracket.
The flexibility an HSA offers to help cover whatever your needs may be, can be very beneficial to your overall investment strategy.
*This article is not a substitute for tax advice. Additionally, not all HSA accounts have the same features and benefits. Consult with a tax professional and read all terms before selecting a plan or making financial decisions. Any article linked within this piece does not count as an endorsement of their content or note that the content linked is up to date as of reading.