Using Your HSA for “Triple-Play” Tax Savings as published in InsideNova.com
In our last article we discussed how a High-Deductible Health Plan (HDHP) + Health Savings Account (HSA) combo is often a better deal than a traditional healthcare plan once you compare total costs and initial tax breaks involved. If it pencils out for you to begin with, an HDHP+HSA combo gets even better over time. How so? HSAs are the ONLY investment accounts with “triple-play” tax savings:
(1) Deduct your HSA contributions. Contribute via payroll, and your taxable income is reduced by the same amount. Use a cafeteria plan and your FICA tax is reduced too. You can even deduct outside dollars you contribute, by declaring them on your Form 1040.
(2) Earn tax-deferred growth. Investments you make within your HSA grow tax-deferred.
(3) Receive tax-free distributions. As long as you spend your HSA distributions on qualified healthcare expenses the distributions come out tax-free. Examples include prescription drugs, eyeglasses, deductibles, co-pays and even long-term care insurance premiums.
How much can you contribute to your HSA? In 2018, it's $3,450 for single health plan coverage and $6,900 for family, plus $1,000 for the policy holder or spouse age 55 or older; a couple could thus conceivably contribute $8,900 annually. If you let these assets grow, you can expect to have a meaningful pool of tax-free funds to spend on medical costs in retirement. You also can bequeath them to your heirs although, there, the tax-free ride ends; non-spouse beneficiaries are taxed on the balance.
A fair warning: if you don’t use the distributions for qualifying medical expenses, you will pay income tax on the distributions. If you’re under 65, you’ll also pay a 20% federal penalty. Read the fine print!
A parting tip: Keep all of your medical receipts from the day you open your HSA. Currently, there is no limit on how far back you can go to reimburse yourself for out-of-pocket medical expenses. Costs paid in 2018 can be reimbursed from your HSA at a future date, giving your account years to grow tax-free.