The Basics of an HSA
An HSA is a savings account for health care expenses tied to what’s known as a High Deductible Health Plan, often offered as a health care option through your employer. This type of account is different from a Flexible Spending Account (FSA), where you can lose any unused portion of your dollars set aside for a given year.
The money set aside in an HSA stays with you forever, similar to how your 401(k) would work. So even if you leave your current employer, your HSA dollars go with you. And like your 401(k), you can invest them.
You own the assets in your HSA forever.
How the high deductible health plan works and whether it is right for your circumstances is a newsletter for another time, but many who currently have this type of plan with an HSA don’t understand the benefits of the HSA in and of itself.
Triple Tax Advantaged
- Your contributions are pre-tax, so they lower your taxable income in the year they are made. Think of this tax savings in the same way you think of your pre-tax 401(k) contributions.
- You can invest your contributions and they will grow tax free, meaning any growth on the account is also NOT taxable. This works like a Roth IRA in this regard, so for high income earners who are phased out of making Roth contributions, this is an excellent tax savings vehicle that offers the same tax free growth one gets from a Roth.
- Withdrawals, AS LONG AS USED FOR QUALIFIED MEDICAL EXPENSES, are 100% tax free.
Boom!!! A Triple Tax Homerun!
Now the caveat is that although you can make contributions to this account on an annual basis to pay for current medical expenses, the goal is to instead pay out of pocket and invest that savings, like you would any other qualified savings account, allowing it to grow tax free for as many years as possible.
With our ever increasing health care costs, this is a great tool for our future selves to have a bucket of tax free money to help cover our future medical care costs.