In this blog post, you’ll gain a practical understanding of the triple tax benefits of a Health Savings Account.
Let’s face it, we all go to the doctor and pay medical bills, and something that was super shocking for me is the fact that the average couple will spend $295,000 in healthcare and medical expenses in retirement.1
In my opinion, there’s no better way to set aside money for your inevitable medical costs than a Health Savings Account (HSA).
What is an HSA?
If you’re not familiar, an HSA is a savings account available to taxpayers in the United States who are enrolled in a high deductible health plan.
An HSA is essentially a bank account—you will have an account number, debit card, and checkbook. The only difference is that you can only use your HSA to pay for qualified medical expenses.
Tax Benefits of HSAs
Let’s talk about these crazy triple tax benefits of HSAs.
- Contributions to your HSA are pre-tax
- Earnings are tax-free
- Qualified withdrawals are tax-free
Don’t worry if this doesn’t immediately make sense to you. Let me demonstrate how this all works and how an HSA will save you money.
Without an HSA
Let’s say Bob makes an annual income of $40,000. He doesn’t contribute anything to an HSA so his taxable income is $40,000. Bob must pay his income taxes of 25% which equals $10,000, so he essentially earns $30,000 per year after tax. Unfortunately, Bob had $3,000 of medical bills last year, so what’s left over is $27,000.
With an HSA
On the other hand, let’s assume the same scenario, but this time Bob has an HSA account.
Bob makes the same $40,000 salary, but this time he contributes $3,500 to his HSA. This reduces his taxable income, so he only has to pay income tax on $36,500 and that means he only pays $9,125 in tax. Poor Bob has the same $3,000 in medical bills, but he can pay for them with money from his HSA account, and what he has left over is $27,375 plus an additional $500 left over in his HSA.
HSA vs No HSA
By having an HSA, Bob saved himself $875 by contributing to his HSA with pre-tax money and withdrawing this money for qualified medical expenses without ever having to pay taxes on it.
Investing Your HSA
As of 2021, you can contribute up to $3,600 if you’re single, and families can contribute up to $7,200 per year to their HSAs.
What I find super cool is the fact that you can also invest your HSA in the stock market (for example), and any growth you realize is 100% tax free.
Check out this blog post to see how my personal HSA has grown by 35% over the course of 2 and a half years by simply investing it in the stock market.