HSA Fundamentals

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How do you completely avoid paying taxes on some of your money? You fund an HSA.

A Health Savings Account, or an HSA, is a tax-advantaged savings plan that you get with a high deductible health insurance plan. Note you do not get this with low deductible plans like the PPO. HSA’s have fantastic tax benefits. Let’s break them down.

First, let’s talk about your contributions. In 2022, you can contribute $3,650 to an HSA if you’re on an individual insurance plan or $7,300 if you are on a family plan. Contributions to your HSA go in pre-tax. So the money is contributed to your HSA from your paycheck before taxes are applied. Next, let’s talk about growth.

Another advantage of an HSA is that you can invest the money. So instead of it sitting in cash, making a couple of tenths of a percent, you can put it in the stock and bond markets. The growth on your HSA is tax-deferred, so you don’t have to worry about paying income tax on your interest and dividends each year.

Lastly, let’s talk about withdrawals. When you’re using an HSA, make sure you’re using the withdrawals for medical expenses. Do not go out and buy yourself a brand new BMW at age 50, or else the IRS will hit you with a 20% penalty and income taxes. When using your HSA for qualified medical expenses, the money comes out tax-free.

This is what is known as the triple tax advantage. It goes in pretax. It grows tax-deferred. And it comes out tax-free. That’s incredible! That’s better than an IRA, a Roth IRA, or a 401(k).

Now, let’s see how this works in practice. Let’s assume you’re 40 years old and you’re going to put money in an HSA for the next 20 years. If you’re maxing it out at $7,300 per year, and you expect the money to grow at an 8% annual rate of return. When you’re 60, you will have $330,000 in your HSA. Medical expenses will likely be one of your largest expenses throughout retirement. Having $330,000 that you can use for these expenses tax-free is an absolute game changer.

Now stay tuned for my video next week, where I’ll compare the high deductible health plan with the PPO.