Triple Tax Advantage – Health Savings Accounts
Health Savings Accounts (HSA) are a great benefit offered by most larger employers to their employees and they are the only account that offers a triple tax advantage. The term triple tax advantage is used for Health Savings Accounts because they have tax advantages in three different forms: 1. Deductions are tax deductible 2. The money grows tax deferred 3. Money can be used tax free for medical expenses.
Eligibility and Contribution Limits – Any taxpayer who participates in a High Deductible Health Plan (HDHP) can contribute to an HSA plan. The limits for 2020 contributions are $3,550 for individuals and $7,100 for families. Contributions can be made for 2020 up until April 15th of 2021. Health Savings Accounts are not eligible for individuals who are currently enrolled in Medicare or those who have any other health coverage.
Benefits of a Health Savings Account
As mentioned before a Health Savings Account has many benefits for individuals and families. Contributions made into an HSA receive a tax deduction in the year they are made even if someone does not itemize deductions on their tax return. This will lower your gross income in the year the contribution is made and the money in the Health Savings Account is pretax. Also, if your employer makes a matching contribution or an involuntary contribution into your HSA account these contributions are not included in taxable income for the year they are contributed. The contributions made to an HSA can be invested and accumulate tax deferred (not taxed in current year) while the money remains in your account. The investment choices in a Health Savings Account are similar to those in a company 401(k) plan. Distributions from the HSA may then be tax free as long as they are used towards qualified medical expenses. These three characteristics are why Health Savings Accounts are referred to as having a triple tax advantage.
Keep in mind that any distribution not used towards qualifying medical expenses will receive a 20% penalty and additional taxes unless the taxpayer has reached age 65. Two other distinct advantages of the HSA are that the HSA is portable, meaning if you change employers you can move the HSA account to a new employer that offers an HSA. Lastly, the contributions and investment earnings may stay in the HSA year after year and are not required to be distributed. This can be used as another form of a retirement savings because the money does not have to be distributed in a certain year if you do not have qualifying medical expenses.
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