Over the years, we have discussed health savings accounts in this space several times. Yet, many folks are still unaware of the tremendous benefits provided through these accounts. To find out if you qualify for a health savings account, read this article. If you do meet the qualifications, you can enjoy the following benefits once you open an HSA:
Health savings accounts provide a double tax benefit. Like a regular IRA or 401(k), contributions to a health savings account are deducted from your taxable income and reduce your income tax burden. The earnings also grow tax-deferred like the earnings inside your IRA or 401(k). Withdrawals, however, make the health savings accounts different than regular retirement accounts. As long as the withdrawals are used to pay for qualified medical expenses, the money is not taxed—not the contribution amount or the earnings. It doesn’t matter if you are paying the provider directly with the health savings account funds or reimbursing yourself for medical expenses you paid out of your pocket.
Supplement Retirement Savings
If you are able to pay your medical expenses out of your pocket without using your health savings account funds, you can let your HSA grow during your working years in addition to your regular retirement accounts. Keep the records for the medical expenses you paid out of your pocket. Then, when you retire, you can withdraw funds from your health savings account tax-free as reimbursement for the medical expenses you paid out of your pocket.
Once you turn 65, you can take withdrawals from your health savings account for any purpose. You will, however, have to pay income tax on the withdrawal amount if the money is not used to pay for qualified medical expenses. If you make non-medical withdrawals from your HSA before age 65, you will also have to pay a 20% penalty for early withdrawal. Consequently, it is very important to keep the documents for any qualified medical expenses you pay out of your pocket. With that documentation to support your HSA withdrawals, no income tax or penalty will be assessed.
As you can see, HSAs are excellent tools to affordably pay for health care, save extra money, and reduce your tax burden. If you qualify, it’s certainly a valid option to consider investing in. Have more questions about HSAs? I’d be happy to help answer them!Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.