A Health Savings Accounts (HSA) truly might be the most underrated savings account.
That’s because it offers three tax advantages:
- The money you contribute to your HSA is tax-deductible.
- The growth is tax free (gains, interest and dividends within the account are not subject to taxes)
- Tax-Free withdrawals when you use the funds to pay for qualified medical or dental expenses.
No other savings account has all three of these tax advantages.
There are a few important considerations to be mindful of:
- HSAs are only available with certain health insurance plans (High Deductible Health Plans – HDHPs)
- For 2023, the plan must have an annual deductible that is more than $1,500 (self-only coverage) and more than $3,000 (for family coverage)
- If you don’t have enough medical expenses to spend the funds on, then the HSA can act as another pre-tax retirement account, acting similar to a traditional IRA or 401(k).
- Once you are 65 years old, you can begin withdrawing from the HSA for non-medical purposes without penalty (distributions would be taxed as ordinary income)
- If you are under 65, you probably do not want to distribute from the account for non-medical reasons, as the distributions are subject to a 20% penalty in addition to ordinary income taxes.
