It can oftentimes be difficult to figure out cost saving mechanisms that are helpful when tax season rolls around, but for many individuals, opening a Health Savings Account (HSA) can be a very useful tool. An HSA is a savings account that is regulated by the government to cover health care costs that aren't covered by your insurance. To be eligible to have contributions made to your HSA, you must be covered under a high-deductible health plan and you can not be a dependent or enrolled in Medicare.
Tax Advantages of an HSA
A primary benefit of an HSA is that they have 3 tax advantages included below:
Contributions that you make into your HSA are tax deductible as an adjustment on income on form 1040. If your employer makes contributions for you, that amount is not taxable.
Interest and dividends earned from the money that’s contributed to an HSA grows tax-free.
Qualified medical expense withdrawals are tax-free. “Qualified” expenses include most medical costs and are detailed in the IRS publication 502, Medical and Dental Expenses.
While offering tax benefits now, Health Savings Accounts also provide protection to help pay for future health-related expenses. Unlike Flexible Spending Accounts, which only allow you to carry over limited assets from one year to the next, HSAs allow you to leave funds in your account as long as possible. Since HSAs do not have a “Use it or Lose it” provision, the ability to let your funds grow in a tax-deferred account provides a smart way to save towards retirement. Retirement may seem like a long way from now for some of you, and for others it may be right around the corner... but it’s never too early or too late to start planning for your future.
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