3 Tax Reasons to Contribute to a Health Savings Account

A health savings account (HSA) is a way to set aside some money, tax-free, to use for possible medical situations you can’t see coming. If you don’t end up needing the money, can also be used as a vehicle for saving for retirement. Using an HSA is also a way to lower your tax burden each year, and their are a variety ways this can happen. If you want help with medical planning or any other financial considerations, consider working with a financial advisor.

HSA 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 2023, the contribution limits are $3,850 ($4,150 in 2024) for individual coverage and $7,750 ($8,300 in 2024) for families. The catch-up contribution limit for those 55 and older remains $1,000.

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.

HSA Tax-Free Withdrawals for Qualified Expenses

Normally, when you chip in money 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. That could really come in handy if you need an additional source of income in retirement.

HSA 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 you’ve got your health insurance with, you may have a wide range of options to choose from. Picking the right mix of investments is key to maximizing your earnings.

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 tap your HSA until you need it, you can sit back and watch your money grow without having to worry about a tax penalty.

Don’t Leave Your HSA Funds Behind

If you decide to part ways with your employer, you’ll want to make sure you’re bringing your HSA along for the ride. Like a 401(k), it’s possible to roll your old HSA over into a new one when you start your new job. You’ll have 60 days to deposit your savings into your new HSA account. If you waste too much time, they might be subject to taxes and penalties.

Bottom Line

A health savings account is a useful vehicle for setting aside money to be used in case of a health emergency. Even if you go your whole career without the need to dip into the tax-free money, it can be held onto into retirement — when you’re more likely to have health issues. The money can be used then to pay for medical expenses rather than using money from your retirement plan. Using an HSA also has good tax implications for you, so consider it when setting up your workplace benefits.

Healthcare Tips

A financial advisor can help you plan for medical expenses, retirement and other sorts of financial challenges. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Though an HSA is great, don’t forget to also save for retirement the traditional way. A workplace savings plan like a 401(k) is likely the easiest way to do this.