How to Save Money on Taxes with an HSA (Health Savings Account)
Health Savings Accounts are like an investment account that lets you spend profits on medical expenses, completely tax-free. It sounds odd, and it kind of is.
What makes it really unique though is that it offers a triple tax advantage.
This means that when you contribute money to the account, you can:
- Write it off and lower your taxable income
- You can invest the money and let it grow tax-free
- And then, when you use the money on qualified medical expenses, you can withdraw it tax-free as well
No other financial accounts give these same tax benefits.
How it works
To qualify for a Health Savings Account, you need to have a high-deductible health insurance plan, which is $1,400 for individuals or $2,800 for families.
Deductible definition: the amount you pay out of pocket before an insurance provider will cover any expenses
Then, individuals are able to contribute up $3,650 to the account each year and families, $7,200.
Let’s look at an example of this in practice:
If you make $80,000 and max out the account ($3,650), assuming a 4% state tax rate, you’d save almost $950 on taxes.
Then, you can invest the money that you put into the account so that it grows over time and you have more money to spend.
Note: If you spend funds on non-qualified expenses, you’ll be taxed at your income tax rate and penalized 20%.
However, when you reach age 65 (or if you become disabled), you can also withdraw the funds for any purpose and not be subject to the penalty, though you’ll have to pay taxes if not used for medical expenses.
But if you wait that long to use the funds, it can make sense hold off on spending from the HSA and choose to spend on health care costs in retirement as it’s estimated that the average retiree spends over $300,000 on medical expenses.
What you can use HSA funds for
While there are some limits to what you can spend HSA funds on, there are a lot of expenses that qualify. Some of these include:
- Ambulance/emergency room costs
- Allergy medicines
- Massage gun
- Nicotine patches
- Reading glasses
- X-ray fees
For a more in-depth list & place to purchase qualified products, visit the HSA store here.
Also, conveniently enough, Amazon offers HSA-friendly products.
They allow you to enter your HSA card info, spend directly from it like a debit card, and filter HSA-qualified products to ensure that your purchases meet the requirements to get the tax benefits.
Where to open an HSA when you’re self-employed
There are a lot of options out there as most banks offer their own, but you want to look for places that offer no fees and user-friendly experiences.
The Wrap Up
HSAs are one of the most impactful accounts that you can open, but you want to be sure that your current insurance plans make you HSA-eligible.
If they do, I can’t recommend this account enough.
Everyone has medical expenses in their life, might as well save money on taxes along the way.