Published June 24, 2022
What are the benefits of an HSA?
There are numerous benefits to HSAs. In this article we'll cover the following:
HSAs are triple tax advantaged
HSAs are unique in that there are three tax benefits you can take advantage of simply by having one: contributions are made pre-tax, any earnings within the account are tax free, and withdrawals are tax free (as long as you use them for qualified medical expenses). Let's look into each one in more detail.
Contributions are tax free: Because you can contribute to your HSA before taxes are taken out (similar to a 401k through your employer), you won't pay federal, state, or local taxes on your contributions. The amount you contribute will also reduce your gross income, so you will pay fewer taxes overall. An example would be if you make $50,000 a year and decide to contribute $2,000 to your HSA in that particular year. Not only would you not pay any taxes on that $2,000, but your gross income would be reduced to $48,000, so you would only be taxed on that amount.
Earnings are tax free: Similar to any retirement account, you can invest the funds in your HSA in the stock market (you may be limited by the types of stocks or funds you can invest in by your specific plan). Any earnings you realize from investing your funds are completely tax free. Keep in mind that you can lose money doing this, so you should only invest funds in your HSA if you're in a strong financial position.
Withdrawals are tax free: When you withdrawal funds to pay for qualified medical expenses, you won't pay any taxes at all.
You can use your HSA to pay for qualified medical expenses
Of course, this is the main reason most people contribute to an HSA: paying for qualified medical expenses. Let's say you have a medical bill for $5,000. You can pay that money from your savings account after it has already been taxed or you could pay for it from your HSA, which as we noted above was contributed and can be withdrawn tax free. If you have significant medical expenses, the savings can be several hundred dollars a year.
HSAs aren't limited to just doctor's or hospital bills or even prescription drugs; you can also use your HSA to pay for many over-the-counter medications, such as Tylenol, prenatal vitamins, tampons, and even sunscreen.
Most HSAs now have cards—similar to credit and debit cards—from which you can pay your medical expenses, so it's often as easy as simply swiping your card at the checkout counter when purchasing eligible products or handing your card to the person at the front desk at your doctor's office. Many hospital systems also have apps now where you can check your medical history, communicate with your doctor, and pay your medical bills. Not only can you use your HSA card in these apps, but many of them offer to keep them on file so payment is as easy as tapping a button when you receive a new bill.
HSA contributions never expire
Unlike FSAs, whose funds generally must be used in the plan year during which contributions are made (employers can choose if they want to allow a small rollover or a grace period to use leftover funds), HSA funds never expire and roll over year to year. This means you could contribute funds in your 20s and 30s when you're healthy and never use them until you're much older.
Also unlike FSAs, you own your HSA and all the money in it. That means it's yours whether you quit your job, get fired, change jobs, retire, or just quit working all together. It's yours forever! FSAs belong to your employer, so once you stop working for that employer, you lose your FSA money.
While there are many reasons to choose an HSA, from the many tax benefits to being more in control of how your spend your own money for your healthcare, only you can decide what kind of account is best for you. If you have any questions, we recommend talking to your employer, benefits administrator, or even your financial planner to help make the best decision for you and your family.