Forward-Thinking Investors Get Triple-Tax-Advantage from Healthcare Savings Accounts

Jane is a 32-year-old and recently discussed Health Savings Accounts (HSA) with her financial advisor on how to get the biggest benefits possible from her limited budget for long-term investments. She discovered that the HSA is much more than just a savings account. In fact, it is a unique financial tool that can become more valuable than the IRA or 401k plan when used intelligently.

To use the HSA, Jane must select a medical insurance plan that qualifies by having a high deductible. She’s likely to find that the monthly premiums are lower when compared to other plans, and that’s because she’ll be responsible for paying the first $1,600i of medical expenses. Jane likes the lower monthly premium, and she has an emergency fund that, if needed, can cover the deductible and the annual maximum out-of-pocket expenses of $8,050ii.

Jane is about to transform a mundane-sounding tool into the most tax-advantaged investment vehicle available in the USA today (in my opinion). She will contribute a maximum of $4,150 to her plan in 2024 and get a tax deduction for that amount when she files her tax return. Jane’s father, who is 55, can contribute an extra $1,000 per year, considered a “catch-up contribution” to his own HSA plan.

Inside her HSA account, she’ll invest that monthly amount as if she had no plans to use it until she is old, much like she should be investing her retirement assets. As the assets grow in value, she pays no tax on any gains, and she can adjust the portfolio to suit her changing needs without concern for triggering any tax.

After Jane retires, she can use the funds to pay for qualified medical expenses, and there will be no taxes due on using those funds. She can even use the HSA funds to pay Medicare premiums when she’s 65. Any medical expense that might qualify as an itemized deduction can be paid using these pre-tax dollars. See IRS Publication 502, Medical and Dental Expenses, for a list ranging from abortion to x-rays.

Healthcare Savings Accounts often get confused with Flexible Savings Accounts, but they are completely different. HSAs are owned by the individual participant, who can keep the assets invested much like an Individual Retirement Account (IRA). Flexible Savings Accounts depend upon an employer relationship and unspent funding returns to the employer at the end of the year.

As Jane’s career progresses, even changing employers or health plans, her HSA can seamlessly move with her. This feature is called portability, and it adds a layer of financial freedom and control over her healthcare savings. Now that Congress is increasing the annual contribution limits, especially since they’ve added catch-up funding allowances for people over 55, it’s time for everyone to consider enrolling in a qualifying high-deductible health care plan.

There are some nuances to the eligibility rules that are fully disclosed in IRS Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans. The qualifying high-deductible plan must be the individual’s only healthcare insurance. Couples can both have their own HSA accounts if they each have a qualifying insurance policy. If your eligibility changes during the calendar year, double-check the rules on contributions.

As always, reach out to a qualified professional with any questions or concerns.

i $1,600 is the minimum deductible to qualify in 2024. That amount has increased by $100 in the two previous years.

ii Maximum out-of-pocket expenses represent the most that a single person could be required to pay, regardless of their total covered health care expenses. Like the deductible amounts, the maximum out-of-pocket amount changes with inflation. It was $7,500 in 2023.

Tracking #509053-1