HSAs (Health Savings Accounts) are some of the most useful and efficient accounts that are out there. They offer a number of benefits and can be used in a number of ways. They are the ONLY financial tool that is TRIPLE-TAX FREE! Let’s go over all the benefits of HSAs that you can take advantage of!
(1) Save Money on Taxes
The first, and most immediate of all the benefits of HSAs is that you save money on your taxes by putting money into an HSA.
You do not pay taxes on each dollar that you put into an HSA. This part works just like a 401k or 403b or other qualified retirement plan. However, just like with these retirement pans, there is the stipulation that you eventually use the funds for the required purpose (retirement income or in the case of an HSA; retirement or healthcare expenses).
Any money that you put into an HSA will bring DOWN your taxable income dollar for dollar.
Let’s look at the example of Mary and Todd.
Mary and Todd both make $50,000 per year and (for the sake of simplicity) are taxed 20% on their earnings.
Mary decides to put money into an HSA to help pay for her future medical expenses. She puts $3,000 into her HSA.
Todd decides to not put any money into his HSA at all.
Here’s how it works out:
| Mary | Todd | |
| Income | $50,000 | $50,000 |
| HSA Contributions | $3,000 | $0 |
| Taxable Income | $47,000 | $50,000 |
| Tax Rate | 20% | 20% |
| Taxes Paid | $9,400 | $10,000 |
So by putting money into her HSA, Mary has saved $600 on taxes.
However, it is important to remember that she MUST use the money in her HSA for healthcare expenses or she will be taxed AND penalized for it (unless she uses it for retirement income after 65).
(2) Pay Your Medical Bills With Tax-Free Money
The next in line of benefits of HSAs really goes without saying. However, I will say it anyway.
When you put money into an HSA and use that money for healthcare expenses you are paying for those healthcare expenses with money that has NEVER been taxed!
Think of it like this. For every HSA dollar that you pay for a healthcare bill with, you are getting a discount that is the same as your tax rate. So if you are in the 22% tax bracket, it is like you are getting a 22% discount on that medical bill.
This can be an especially great tool for large healthcare costs.
If you have a large medical expense coming up, an HSA is a GREAT way to save for it.
For example, if you are wanting laser eye surgery it can easily cost around $5,000. If you are in a 22% income bracket and save the money to pay for it in your HSA, it will save you $1,100.
(3) Tax Free/Deferred Growth
I know that tax-free and tax-deferred growth are different things. However, with the next of the benefits of HSAs, you can have some of both. Let me explain.
If you deposit money into an HSA and let it grow with interest over time and use that HSA for medical expenses, you will never pay taxes on that money. Thus tax-free growth.
But if you deposit money into an HSA and let it grow with interest over time and wait to use that money until you reach age 65, you will only have to pay regular income taxes on it (and no penalty). Thus tax-deferred growth (because you have been deferring the taxes).
But as I’ve said a few times now, make sure that you use that money for medical expenses if you are younger than age 65 or you will be taxed and penalized. You don’t want that.
(4) You Can Save Up Medical Bills and Reimburse Yourself Later
This is my favorite of the benefits of HSAs, personally. However, you have to be a little more savvy.
If you put money into an HSA you don’t necessarily have to use that HSA to pay for your medical bills. You can pay for them with a credit card or your checking account if you want. This would leave the money in your HSA so it can keep growing.
“Why would you do that?” you ask.
You would do that because with an HSA, you can reimburse yourself for past years medical expenses at a later time even if you are younger than 65.
Oh, and it is all tax free with no penalty. 🙂
For this to make more sense, let’s look at an example of Sarah.
When Sarah is 25 she starts putting money into an HSA. She puts $3,000 into the HSA each year. Each year that money grows at 8% interest.
Sarah has some ongoing health issues though and has medical expenses of $5,000 each year that she pays for out of her own pocket (not the HSA). However, she saves ALL of her receipts for medical expenses in the cloud for this entire time.
This goes on for 20 years until Sarah’s health improves when she is 45. Because she has battled poor health for so many years and is now better, she decides to take a year off and backpack through Europe.
She can then go to the cloud and submit ALL the receipts for EVERY medical bill she has had while she has had the HSA for reimbursement.
AND IT IS TAX FREE BECAUSE IT WAS FOR MEDICAL EXPENSES!
Here’s how it looks for Sarah:
| Amount Invested Annually | $3,000 |
| Years Invested | 20 |
| Total Amount Invested | $60,000 |
| Growth Rate | 8% |
| Total Amount in Account | $137,285 |
| Amount of Qualified Medical Expenses | $100,000 |
| Amount Able to Withdraw | $100,000 |
| Taxes on the Withdrawn Amount | $0 |
| What is STILL in the HSA | $37,285 |
This is a really powerful tool. If you are able to both put money into an HSA as well as pay for your medical bills out of pocket, you can have a great tool to help you achieve a lifelong dream, retire early, or do whatever you want at any age.
And because of the growth that the HSA can have, you have a greater likelihood of there STILL being money left in the account after you reimburse yourself.
It is really powerful.
(5) It Can Be Used as a Retirement Account
The last of the major benefits of HSAs is that you can use them as a retirement account.
If you have an HSA and do not use it because you are a relatively healthy person and/or you have the ability to pay for your medical bills out of pocket, you can then take that money out of the account after you reach age 65 and only pay taxes on it. You will not have to pay a penalty so long as you are 65 or older.
In this way it works just like a qualified retirement account like a 401k, 403b, IRA, etc. except for that with these other retirement plans you are able to take the money out at 59 ½ with no penalty. Whereas, with an HSA, you will have to wait until you are 65.
Final Thoughts
An HSA (if used correctly) can be a powerful tool in your financial and healthcare arsenal. There are also several different ways to use an HSA which can help most people that are eligible to have one. You can use it as a clearing account to save money on taxes, as an early retirement account, or simply as a retirement account.
If you don’t have an HSA, look into it. They are not right for everybody, but you should at least consider it. 🙂
I am here to help you sift through the jungle that is personal finance.
I’ll help in any way that I can!
You can do this!
Until next time!
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