Nothing cooler during Taxtember than to talk about something being triple tax advantage. To achieve that label:
Contributions are tax-free - You don’t have to pay income taxes as they come pre-tax from your paycheck or from your employer. (Like a IRA….Not a ROTH)
Tax-free growth – Earnings and interest grow tax-free in the account (like a ROTH or a IRA)
Tax-free withdrawals – qualified distributions are not taxed from the account (like a ROTH…not an IRA)
What account achieves the lofty label of being Triple Tax Advantage? The Health Savings Account or known as a HSA.
Unfortunately the HSA isn’t for everyone. You must be enrolled in a high-deductible health insurance plan. If you currently are enrolled in Medicare you can keep your HSA account, but you no longer can add to it. Contribution limits are $3,600 for individuals and $7,200 for families for 2021. Distributions must be made for qualified medical expenses.
To make the most of HSA Triple Tax Free advantage, we most focus on the tax-free growth. In order to do that, we must allow the contributions to grow each year and not deduct medical expenses from the account. Instead pay your prescriptions and check up’s from your checking account. The next thing is invest a portion of your HSA into the equity markets for the best chance for growth. Remember to consider these accounts long term because there will be more risk investing in equities than a savings accounts currently paying under 1.00%.
Just “rinse and repeat” each year. If we do a $7,200 annual contribution growing on average of 6% the account will grow to over $500,000 in 30 years. (Oldfather Financial now can offer HSA to our clients which will give them various investment choices. Give us a call to explain.)
Another neat trick with an HSA is you can withdraw money for qualified medical expenses at any time. Meaning if you pay for a $5,000 surgical procedure with your checking account 5 years ago and now find yourself needing $5,000 tax-free for a vacation you can withdraw the money. Just be sure you keep a copy of the paid invoice and method of payment in a safe place for documentation purposes.
This is just a primer for HSA accounts. If you have any questions contact your HR department when you sign up for a high deductible insurance plan or give us a call.