No Tax Now and Tax Free Later with HSAs

Let’s talk about health savings accounts. We’ll talk about what they are, and how they can provide some big tax benefits for you. So health savings accounts are often kinda confusing and can get confused with FSA accounts, which is a completely different animal. FSA stands for flexible spending account. And those accounts, it’s a use it or lose it so, it can come out of your paycheck, it comes out pre-tax, but then you have to use that money for medical expenses that year or you lose it. With a health savings account, one of the big benefits is that, yes, you get a tax deduction now, which is great, but also, you don’t have to use that money right away on medical expenses. You can wait for quite a long time, but you’ve built up an account that will have money there available and ready for you whenever you need it.

Now, one caution is that you have to have a plan that is eligible to use a health savings account. Which means, you have to have a high enough deductible, and you also just have to have the plan set up to where it can accept a health savings account. So, the way to say it is that, not every plan that is a high deductible plan necessarily allows you to use a health savings account with it. The deductible’s one piece, but you have to check with the plan first, to make sure that a health savings account is an option for you. So what happens with a health savings account is that you can make contributions to it, and get a tax deduction on those contributions. Plus, the added benefit is that, if you use the expenses to pay for medical costs, you do not pay taxes when you take the money out of the account. Which means this can provide some really really big long-term benefits, if you can wait and invest the money along the way.

Sometimes we’ll have clients who put money in a health savings account and, unfortunately, they have something bad happen medically and they need that money. And that’s okay, that’s a good result, you’ve put the money aside, you’ve got the tax deduction, and now you’re using it for much-needed medical costs. If you can, it’s even better to wait to use that money. And it can act really as another retirement account with additional benefits if you can really wait a long time.

What happens in this instance is, you put the money in, you get the tax deduction for it in the year that you put the money in. And then you allow it to grow over time. So you can invest it in, pretty much anything really. But if you wanted to put it in some stocks and bonds over 20, 30 years, you can do that. It can act like another investment account, with the beautiful thing being that, if you’re older and you’re in your retirement years and you have medical expenses, which is pretty likely, then you can take that money out of that account and not pay any tax on it. So you’re really getting the benefits of tax deduction now, and then having a tax-free distribution in the future, as long as you’re using it for medical expenses.

That’s an overview of the health savings account, and why it can be such a powerful tool, because you’re getting tax benefits on the front-end and the back-end, and you’re saving money in the meantime. While it never hurts to save money. If you have any questions on health savings account, feel free to reach out to me, give me a call, shoot me an email, I’m happy to help.

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