Millions of Americans are eligible to contribute to health savings accounts, or HSAs, but few people actually take full advantage of this tax-advantaged investment account or realize the full extent of its benefits. Here’s what you need to know about HSAs in 2018, and why their unique benefits make them one of the best tax-advantaged account types of all.
1. Tax-Deductible Contributions
When you’re trying to lower your tax bill, it’s in your best interest to claim every deduction possible. Deductions reduce your taxable income, which can potentially push you into a lower tax bracket. With an HSA, you’re allowed to write-off the money you contribute for the year.
For tax year 2019, the contribution limits are set at $3,500 if you have individual coverage and $7,000 for families. You can add an extra $1,000 if you’re age 55 or older.
You have until the annual filing deadline to make contributions for the previous tax year. So if you’re scrambling to find some last-minute tax breaks, maxing out your HSA can be a big help. The best part is, you don’t have to itemize to claim the deduction.
2. Tax-Free Withdrawals for Qualified Expenses
Normally, when you contribute to a tax-advantaged account such as a 401(k) or an IRA, you’re expected to pay taxes on the money once you start making withdrawals. When you take a distribution from an HSA, on the other hand, you typically won’t pay any taxes as long as you’re using the money for qualified medical expenses.
If you decide to use HSA funds for something other than healthcare, you might have to pay regular income tax on the money along with an additional 20% tax penalty. If you’re over age 65, however, the 20% penalty is waived and the distribution would just be taxed at your regular rate. This could come in handy if you need an additional source of income in retirement.
3. Earnings Grow Tax-Free
When you sign up for a health savings account, one of the most important things you’ll have to think about is how you’re going to invest the money you’ve saved. Depending on who your health insurance plan and institution they work with, you may have a wide range of options to choose from.
One of the great things about an HSA is that no matter how much your account increases in value over time, your earnings normally aren’t subject to tax. Since you’re not required to use your HSA until you actually need it, you can sit back and watch your money grow without having to worry about a tax penalty.
