Don’t Have an HSA? Why You Could Be Missing Out

No one likes surprises from Uncle Sam. Especially in the form of an unexpected tax bill.

With April 15th fast approaching, now’s a great time to tee up hidden savings with what many financial planners deem the most powerful tax-advantaged tool in the IRS tax code: the health savings account (HSA).

Offered alongside many high-deductible health plans (HDHP), HSAs are designed to help you pay for qualified healthcare expenses — copays, deductibles, coinsurance, vision care, dental visits, and certain medical supplies (see IRS Publication 502 for a complete list). Here are the perks you need to know about:

Your contributions are tax deductible. With an HSA, you’re allowed to write-off the money you contribute for the year. By claiming this deduction, you’ll not only be able to protect pre-tax money for health expenses, but you’ll also reduce your taxable income, which can potentially push you into a lower tax bracket.

For 2019, you can contribute up to $3,500 as an individual or up to $7,000 as a family. If you’re 55 or older, you also get a $1,000 catch-up option. For 2020, you’ll be able to contribute even more: up to $3,550 as an individual and up to $7,100 as a family.

To make a contribution, you can sign up for automatic payroll deductions through your employer, or make direct contributions from your own funds at any time. If you contribute post-tax, you can still recognize the same tax savings by claiming the deduction when filing your annual taxes. (Bonus: you don’t have to itemize.)

If your employer doesn’t offer an HSA with your HDHP, you can set one up at any time during the plan year through an outside bank or other financial institution like Lively, Fidelity, or HSA Bank.

Your savings grow tax deferred. Unlike flexible spending account (FSA), you have the option to invest your HSA balance in mutual funds or other investment tools. Even better, you don’t have to pay annual taxes on capital gains, interest income, or dividends that occur within the account.

It’s yours forever. Have unused funds? There’s no “use-it-or-lose-it” rule like with a FSA. Your money rolls over from year to year and continues earning interest. HSAs are not tied to a specific employer and will stay with you if you change employers or retire.

Your withdrawals are tax-free. As long as you spend HSA money on qualifying medical expenses, you’re in the clear from taxes, and a 20% penalty. After age 65, HSA funds can be used to pay for health insurance premiums, including Medicare Part B premiums and long-term care insurance premiums. If you don’t need your HSA funds for medical expenses or insurance premiums after age 65, you will pay taxes on withdrawals (like an IRA or 401K), but there is no penalty tax.

Not sure whether you should contribute this year? Check out this helpful HSA Tax Savings Calculator from HSA Store. Ultimately, if you end up owing money to the IRS, putting that extra cash into last year’s HSA could reverse that underpayment and even score you a refund.