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HSA tax benefits are very compelling and are perfect for folks who intend to live a long, healthy life.
As such, a Health Savings Account (HSA) is a great tax saving tool for any person living in the U.S. who’s looking to save a few tax dollars.
I have had an HSA for a few years.
The tax benefits of an HSA are great for people who have high health insurance premiums.
Five Tax Benefits of an HSA
The HSA is a great tax saving, and investment, tool for five primary reasons:
- Tax Deductions: HSAs allow you to deduct from your taxable income, just like an individual retirement account (IRA). You can deduct the full amount of your contribution, up to the maximum allowable legal amount, every year.
- Withdraw Tax Free: You can withdraw HSA money for qualified medical expenses tax free.
- Tax Free Income Growth: Investments in your HSA can grow tax free.
- Contribution Carry Overs: Your contributions do not expire, nor are they forfeited in any way if you have an unused balance at the end of the year (unlike a flexible spending account (FSA))
- Incentives to Stay Healthy: An HSA encourages you to stay healthy by rewarding you with compound interest. The longer you stay healthy and contribute to your HSA, the more money you’ll have if/when the sh*t hits the fan with your health.
HSA Contribution Example:
For instance, if you make $100,000 and are taxed at a 20% rate, you would pay $20,000 in taxes. However, if you fund an HSA up to the full amount allowed you would have only $93,250 in taxable income, while still having the money available to pay for any necessary medical expenses.
You can then withdraw from your HSA tax free as long as you are paying for qualified medical expenses, as defined by the IRS. You can pay for a wide range of IRS-qualified medical expenses with your HSA, including many that aren’t typically covered by health insurance plans.
HSA Limits for 2017 and 2018
According to HSABank, the federal contribution limits for HSAs are going up in 2018. For a family in 2017 the HSA limit is $6,750 but that is increasing in 2018 to $6,900 for a family.
HSA qualified medical expenses:
You can find a full list of qualified medical expenses that are approved by the IRS on their website. The most recent year is 2016. The following is a partial list of qualified medical expenses for 2016.
- Alcoholism treatment
- Ambulance services
- Annual physical examination
- Artifcial limb or prosthesis
- Birth control pills (by prescription)
- Convalescent home (for medical treatment only)
- Doctor’s fees
- Dental treatments (including x-rays, braces, dentures, fllings, oral surgery)
- Diagnostic services
- Disabled dependent care
- Drug addiction therapy
- Fertility enhancement (including in-vitro fertilization)
- Guide dog (or other service animal)
- Hearing aids and batteries
- Hospital billsInsurance premiums
- Laboratory fees
- Lactation expenses
- Lodging (away from home for outpatient care)
- Medical transportation expenses
- Nursing home
- Nursing services
- Pregnancy test kit
- Prescription drugs and medicines (over-the-counter drugs are not IRS-qualifed medical expenses unless prescribed by a doctor)
- Prenatal care & postnatal treatments
- Smoking cessation programs
- Special education tutoring
- Telephone or TV equipment to assist the hearing or vision impaired
- Therapy or counseling
- Vision care (including eyeglasses, contact lenses, lasik surgery)
- Weight loss programs diagnosed by a physician – such as obesity, hypertension, or heart disease)
Interest and Earnings Grow Tax Deferred (and Can Be Withdrawn Tax Free)
If you have an HSA you can earn interest and have it grow tax deferred.
Any qualified withdrawals will be tax free.
An HSA with an investment account is even better. With an HSA with an investment account, once you reach the minimum investment threshold, you can also invest a portion of your money in selected mutual funds, index funds or ETFs.
For example, the Optum Bank HSA provides you with choices of mutual funds from Vanguard that have very low expense ratios (aka “loads”). Some examples of funds from Vanguard available with the Optum HSA are below.
Each of the funds from Vanguard above provide a yield that is greater than their loads, according to Morningstar.
As such, the funds could increase (or fall, of course) in value while also paying a yield each year adding compounding value to funds that reinvest dividends over time.
Perhaps the best aspect of the HSA is that it encourages you to keep yourself healthy and not incur major health expenses because the longer you can build your HSA with investment returns, the greater the chances that you’ll have stockpiled enough to pay for healthcare expenses when you really get old.