Unlocking the Tax Secrets of Health Savings Accounts

Health Savings Accounts (HSAs) are a great way to save money on healthcare expenses, but they also come with some tax benefits that are worth exploring. HSAs are triple tax-advantaged, meaning contributions, earnings, and withdrawals for qualified medical expenses are all tax-free.

If you're eligible, you can contribute up to $3,550 to an HSA in 2022 as an individual, or up to $7,100 if you have a family plan. These contributions are made with pre-tax dollars, reducing your taxable income.

To qualify for an HSA, you must have a High-Deductible Health Plan (HDHP), which means you have a deductible of at least $1,400 for individuals or $2,800 for families in 2022.

An HSA, or Health Savings Account, is a type of savings account designed to help you pay for medical expenses.

To be eligible for an HSA, you need to have a high-deductible health plan (HDHP), which requires a minimum deductible of $1,650 for an individual or $3,300 for a family in 2025.

You can contribute to an HSA via payroll deductions and may also receive contributions from your employer.

Annual contribution limits apply, depending on whether your health plan covers an individual or a family.

You can use your HSA money at any time to pay for qualified medical expenses.

Typically, HSA contributions are made with the intention of saving for future medical expenses, rather than trying to pay for them out of pocket.

HSAs offer three major benefits for federal income taxes: contributions reduce your taxable income, growth of the account is tax-deferred, and distributions for qualified medical expenses are tax-free.

You can use your HSA for long-term savings goals like retirement, but it can also save you money in the short run on your medical care.

There are three ways to maximize an HSA's potential, and the right choice depends on your situation.

An HSA is extremely versatile, and you can withdraw account funds to pay yourself back (tax-free) for earlier expenses, including fertility treatment.

You can use your HSA to pay back medical expenses you've incurred in the past, without raising your taxable income. Say you've spent $10,000 out of pocket on medical bills, you can withdraw that $10,000 from your HSA for past costs without raising your taxable income.

Contributions to an HSA reduce your taxable income, and you can withdraw the funds tax-free for qualified medical expenses, for you and your family.

To make the most of your HSA, create a spreadsheet of unreimbursed medical expenses, and keep receipts for proof, just like keeping track of your receipts for your car expenses.

Here are the three major benefits of HSAs:

Using your HSA can be a game-changer for your finances. Contributions reduce your taxable income without itemizing deductions. You can use the funds in your account to cover Medicare premiums, out-of-pocket expenses, and even a portion of long-term care policy premiums.

To make the most of your HSA, consider contributing enough to cover your expected medical expenses - and then some. Aim to build the account to completely cover one or more years of maximum out-of-pocket costs.

Here's a rough guide to help you get started:

By following this strategy, you can establish a reserve over time in case of a major health expense and take advantage of the triple tax benefit.

You can use your HSA to cover medical expenses, but that's not all it's for. Contributions reduce your taxable income without having to itemize deductions, and growth of the account is tax-deferred.

To get started, consider opening an HSA even if you don't have the money right now. This allows you to incur medical expenses that can be reimbursed by funds you eventually deposit into the account.

Having an HSA can be surprisingly useful, even with $0 in it. Any medical expense you incur from that point forward can be reimbursed by funds you eventually deposit into the account.

To maximize the benefits, aim to build the account to completely cover one or more years of maximum out-of-pocket costs. This will help you establish a reserve over time in case of a major health expense.

Here are some key contribution limits to keep in mind:

By following this strategy, you can use your HSA to cover significant expenses in retirement, and avoid jumping to a higher tax bracket or incurring higher Medicare premiums.

HSAs can be a great way to save money on taxes, but one of the lesser-known benefits is HSA reimbursement. You can withdraw funds from your HSA to pay yourself back for medical expenses you paid out of pocket in the past.

Savers who pay out of pocket for health costs can take advantage of this benefit in future years. You can withdraw account funds to pay yourself back (tax-free) for those earlier expenses. This can offer retirement income and help you control your tax bill.

For example, if you're on the cusp of jumping into a higher income-tax bracket in retirement, you can withdraw past medical expenses from your HSA without raising your taxable income. Say you had spent $10,000 out of pocket over the years on medical bills. You can withdraw that $10,000 from your HSA for past costs without raising your taxable income.

Keep in mind that expenses incurred before you establish your HSA aren't considered qualifying medical costs. To take advantage of this benefit, it's a good idea to create a spreadsheet of unreimbursed medical expenses and keep receipts for proof.

Here are some examples of qualified medical expenses you can be reimbursed for:

Remember to keep track of your expenses and receipts to ensure you can take advantage of this benefit in the future.

You can contribute to an HSA even if you're on your parents' health insurance plan, as long as you participate in a qualifying high-deductible health plan and can't be claimed as a dependent. You can deposit up to the family contribution limit, which is $7,300 in 2022.

To open your own HSA account, you'll need to do so directly since you're not going through your employer. This means you can contribute from other sources, such as a windfall or gift, and your contribution won't affect your parents' ability to contribute to an HSA.

If you're on your parents' plan, you can contribute to an HSA without needing earned income, making it a great option for young workers.

The annual contribution limits for HSAs depend on whether the health plan covers an individual or a family, with limits of $3,650 and $7,300, respectively, for 2022.

If you're on a family insurance plan, you can deposit the family contribution limit for the year, which is $7,300 in 2022, regardless of whether you have earned income or not.

You can use your HSA money at any time to pay for qualified medical expenses, making it a great way to save for future healthcare costs.

Here's a breakdown of the key points to consider when it comes to HSAs and your plan:

Managing your HSA effectively can save you a lot of money on taxes. To avoid costly mistakes, be aware that using the account for nonqualified expenses before age 65 will result in a double whammy: paying ordinary tax on the withdrawal plus a 20% penalty.

Leaving a large balance to a non-spouse beneficiary can also be problematic, as they'll have to pay taxes on the balance in the same year, potentially bumping them into a higher tax bracket. This is why it's better to draw down the account in retirement to pay for medical expenses.

Contributing to an HSA via payroll deductions is generally not subject to payroll taxes, making it the best way to contribute, especially if your wage income is under the threshold for Social Security taxes ($168,600 in 2025). You can also make additional contributions up to IRS limits, but only until your tax filing deadline in April 2025 for the previous year's contributions.

Here are some HSA transfer options to consider:

Using your HSA to cover your projected medical expenses is perfectly fine, especially if you have other financial goals. However, saving in an HSA early can give you more options down the road to pay for healthcare expenses.

Contributions to your HSA reduce your taxable income without requiring itemization of deductions.

You can contribute to your HSA via payroll deductions, which are generally not subject to payroll taxes. This is a great way to save, especially if your income is under the Social Security tax threshold of $168,600 in 2025.

If you're able to save more than you set up through payroll deductions, you can make additional contributions to the HSA on your own, up to IRS limits. You have until your tax filing deadline in April 2025 for 2024 HSA contributions.

Using your HSA for nonqualified expenses before age 65 results in paying ordinary tax on the withdrawal plus a 20% penalty. This is worse than the 10% early withdrawal penalties from retirement accounts.

After age 65, withdrawals for nonqualified expenses only result in paying ordinary tax on the amount.

Switching HSA providers can be a simple way to get more out of your account. You can move your HSA funds to a different provider if you're not happy with the fees or investment options offered by your current one.

Your employer may have set up an account with a specific provider, but the funds are ultimately yours to manage. You can transfer your funds to a new provider that offers more favorable terms.

Some providers may charge a fee to transfer your funds, so be sure to factor that into your decision. You can ask the new provider to reimburse the fee if it's worth it to you.

You can perform a simple HSA transfer to a new provider with no fees and plenty of investment choices. This can give you more control over your money and help you make the most of your HSA.