By Andy Smith

Health Savings Accounts: Getting the Most Out Of Your HSA

From how much to contribute to considerations for investing the money, here’s how to use the account to save on your tax bills.

• Health savings accounts (HSAs) offer a “triple tax benefit” for federal taxes.
• A good strategy is to contribute enough to the HSA to cover the next year or more of out-of-pocket medical expenses.
• Contributing the maximum annual contribution and investing for the long term is the best way to get the most benefit from your HSA.
• Avoid using the HSA as your emergency fund because non-qualified withdrawals are subject to ordinary taxes and possibly penalties.

THE BENEFITS OF HSAs

HSAs offer three major benefits for federal income taxes:

• Contributions reduce your taxable income without having to itemize deductions.
• Growth of the account is tax-deferred.
• Distributions for qualified medical expenses—for you and your family—are tax-free.
  If you’re in a position to use this long-term strategy, the HSA can help cover significant expenses in retirement. Using tax-free distributions instead of tax-deferred accounts may also prevent you from jumping to a higher tax bracket or incurring higher Medicare premiums.
  

COSTLY HSA MISTAKES TO AVOID

There are two big mistakes you want to avoid when using your HSA. 

The first mistake to avoid is using the account for non-qualified expenses. If you do this before age 65, there’s a double whammy: paying ordinary tax on the withdrawal plus a 20% penalty. That’s worse than the 10% early withdrawal penalties from retirement accounts. After age 65, withdrawals for non-qualified expenses result in paying ordinary tax on the amount. 

Secondly, avoid leaving a large balance to a non-spouse beneficiary. It could be costly. Upon the account holder’s death, the non-spouse beneficiary will have to pay taxes on the balance in that same year. This could bump your beneficiary into a higher tax bracket. This is why it’s better to draw down the account in retirement to pay for medical expenses, as opposed to preserving it for your heirs. Fortunately, a spouse who inherits an HSA assumes ownership of the account and doesn’t pay tax on the balance.

The Ever Wealth team strives to provide friendly, local financial guidance. If you’re ready to get started on your financial journey with Ever Wealth in Auburn, Indiana, reach out today!