A Health Savings Account is a tax advantaged account that is only available to participants of High Deductible Health Plans (HDHP). The two biggest tax advantages of Health Savings Accounts are as follows:
- You may receive a federal income tax deduction for contributions made to Health Savings Accounts. For 2024 the maximum deduction for single filing taxpayers is $4,150 and the maximum deduction for married filing jointly taxpayers is $8,300. The limits are indexed for inflation and may change from year to year.
- You may invest the funds in your Health Savings Account. If your investment grows, the growth is tax free if the funds are used on Qualified Medical Expenses that are not covered by the High Deductible Health Plan.
Often time’s people wonder, “What is a Qualified Medical Expense?”. The list is extensive and oftentimes includes expenses that people do not know are qualified medical expenses. Here is a link to the IRS website that describes the list of qualified medical expenses:
You will want to confirm with your insurance provider specifically what they consider Qualified Medical Expenses.
Another great feature of Health Savings Accounts is that when you turn 65 you may use the funds on whatever you want and there is no penalty. You must pay ordinary income taxes on the entire amount distributed but you do not have to pay a penalty. This effectively allows the Health Savings Account to act as a Traditional IRA once you reach age 65.
Health Savings Accounts are portable and may go with you if you change employers. Another great benefit of Health Savings Accounts is that you do not have to have earned income to make contributions and receive the income tax deduction.
Health Savings Accounts can be versatile, powerful and impactful vehicles to utilize for building wealth and managing the risk of increasing healthcare costs. They are not appropriate for everyone and have their drawbacks, one of which being the high deductible that’s required to use Health Savings Accounts. Other health insurance plans that do not offer Health Savings Accounts may be more appropriate for you depending on your health, expenses, income, and family status. Talk with a financial professional to learn more about Health Savings Accounts and what options are best for you.