The Triple Tax Benefits of Health Savings Accounts (HSAs)

Everyone who works with a financial advisor has different reasons for doing so. And one of the more common reasons for doing so is to receive tax management services. With that in mind, you need to pay special attention to this video, because you’re going to learn about one of the best tax-preferenced savings vehicles that’s available to you today.

If tax management is one of your primary financial concerns, the best and first place you might want to consider for tax-preferenced saving is a health savings account (HSA). An HSA is the only triple tax-free option available right now that gives you a tax deduction going in, tax-deferred growth along the way, and tax-free distributions on the back end. Keep in mind that the distributions must be used for qualified medical-related expenses, but it’s a good bet that virtually everyone will incur at least some medical costs in the future.

The key here to maximizing the HSA for savings is to pay all of your actual medical expenses as they occur out of pocket, while at the same time contributing to the HSA for FUTURE medical expenses. This allows the HSA the time to potentially grow tax-deferred and tax-free in order to leverage these benefits even more.

In this way, the HSA becomes a kind of supplemental retirement savings account where the money is earmarked for tax-free distribution of funds for your qualified medical expenses in retirement, including some long-term care expenses and insurance premiums. And once you establish your HSA, you can reimburse yourself on a tax-free basis for any IRS-qualified medical expenses you incur from that point forward directly from the HSA—even many years later.

Of course, an HSA is only permitted for those who already have a high-deductible health plan that satisfies minimum deductibles and maximum out-of-pocket costs. And you need to know that the sweet spot for HSAs, as they relate to retirement savings, is age 65 or older. If you withdraw funds at any age for qualified medical expenses, you’ll pay no taxes and no penalties. But if you take money out of the HSA for any other expenses, the withdrawals will be subject to taxation—and you’ll pay a 20%penalty if you’re under the age of 65. So yes, there are caveats.

An HSA is just the first of several ways that individuals and households can build tax-preferenced savings. We’ll tell you about the others in future videos, but if you don’t want to wait then you can call us here at Lucia Capital Group and we’ll be happy to tell you all about them.