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Health Savings Account Tax Benefits

Understanding Health Savings Accounts And Their Advantages

Here’s how to get the most tax benefits out of a health savings account

Karla Dennis, EA, MST & CEO of The Award Winning Tax Accounting Firm, Karla Dennis and Associates Inc.Specializing In Tax Planning.


One of the less discussed tools of wealthy individuals is the health savings account . An HSA is essentially a bank account set up to pay for out-of-pocket medical costs. Someone can go into their bank, set up an HSA bank account, and then proceed to utilize it to pay for items not covered by their high-deductible healthcare plan. That same HSA also has an interest rate built in, which allows for the money to grow while sitting in the account. And these interest rates can be a lot higher than a traditional savings account, depending on the banking institution you open the account with. Individuals are able to get an interest rate as low as half a point, upwards of 2%, and some rates may continue to climb.

Now, what are the tax benefits of a health savings account? One of the first tax benefits of using this account is the money deposited is considered to be pre-tax dollars. Pre-tax dollars mean there is no tax on the money that is put into that account. Similar to a 401 plan, when someone is putting money to the side through a 401, they dont pay taxes on it. So when someone is contributing to an HSA, they will be contributing tax-free. The individual with the HSA will not have to pay taxes on their money while it grows in this account.

Children Cannot Open An Hsa If They Can Be Claimed As A Dependent On Their Parents Tax Return

In order for an adult child to open an HSA, they cannot be claimed as a dependent on anothers tax return. Importantly, if the childs parents dont but can claim them as a dependent, they would still not be allowed to open an HSA. Which means that parents need to be aware of what actually makes a child a qualifying dependent .

There are 5 tests that must be met for a child to be considered a qualifying child for parents to claim them as a dependent. These tests, as described by the IRS and listed below, must all be met for a child to be considered a qualifying child, and are based on relationship, age, residency, support, and joint return:

  • Relationship: The child must be the taxpayers biological or adopted son or daughter, foster child, or descendant of any of these people
  • Age: As of December 31, the child must be younger than age 19, or younger than age 24 if they are a full-time student. They must also be younger than the taxpayer who is claiming the dependent. There is no age limit if they are permanently and totally disabled
  • Residency: Generally, the child must have lived with their parents for more than half the year
  • Support: The child may not have provided more than half their own support for the year and
  • Filing Status: The child may not file a joint return unless the purpose is to claim a refund of withheld or estimated paid taxes.
  • Gross Income Test: The childs gross income must be less than a certain amount for the year.
  • Nerd Note:

    Can I Pay My Insurance Premiums With My Hsa Funds

    In most cases, no. HSAs can be used for most medical expenses, like doctors appointments, prescriptions, or over-the-counter medications, but not your monthly premium. The only exception to this rule is when the funds are used to pay Medicare premiums or other healthcare continuation coverage, such as COBRA, while youre on unemployment compensation. You may also pay for long-term care insurance using your HSA.

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    Advantages Of A Health Savings Account

    Since you are bound to encounter health care costs at some point, money in an HSA can be more valuable than other retirement savings for three reasons:

  • No tax on the way in or out of the plan. With retirement plans like a 401 or IRA, money is taxed either on its way into or out of the plan. With an HSA, contributions are deductible and distributions are tax-exempt as long as they are used for eligible medical expenses.
  • No age restrictions on when you can take money out. With retirement plans, there are restrictions on how soon you can take money out. If you take money out early, you face a 10% penalty on top of any ordinary tax consequences. Money in an HSA can be taken out at any time, providing it is used for eligible medical expenses.
  • Opportunity for additional contributions beyond retirement plan limits. HSA contributions can supplement your retirement savings. There is an annual dollar limit to how much you can contribute to a 401 or IRA. Putting money into an HSA can allow you to get additional tax benefits over and above retirement plan contribution limits.
  • How Can I Tap Into My Hsa Funds

    Tax Benefits of a Health Savings Account

    There are a number of ways you can tap into the cash in your HSA. While the availability of certain features will differ depending on the provider, some HSAs will give you a debit card or checkbook that you can use to directly pay for qualified medical expenses. With other providers, you might be able to set up a direct transfer of funds from your HSA to your regular bank account to reimburse yourself for qualified expenses youâve already incurred. You can check with your employer or the HSA administrator to learn about the available options.

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    What Is The Main Benefit Of A Health Savings Account

    Having a health savings account alleviates some of the stress of unexpected and unpredictable medical expenses. Better yet, the money you save in this account is tax-free.

    You can claim a deduction on your tax return for your HSA contributions regardless of whether or not you itemize deductions. You can claim a tax deduction even if someone other than your employer makes a contribution to your HSA.

    If your employer contributes to your HSA, these contributions are excluded from your gross income. This includes contributions that you receive via a cafeteria plan.

    Withdrawals from your HSA that are used for medical expenses are not subject to taxation.

    You do not even pay taxes on the earnings and interest you receive from the assets you hold in your HSA.

    Are There Any Time Restrictions On My Ability To Use An Hsa

    No. One of the great advantages of an HSA is that youâre not required to take money out of it by any given date, such as the end of the year â you can save and may even be able to invest your balance until you need it. If you lose your job and continue insurance coverage under COBRA, you can use your HSA to pay your premiums. Another plus: Even if you leave the employer that originally sponsored your HSA, you can keep that HSA, or transfer or roll the balance over to another HSA â one offered by your new employer or an HSA you open yourself.

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    Tax Treatment For Hsa Contributions

    Contributions to an HSA are tax-deductible on your Form 1040 tax return as an adjustment to income. However, you don’t have to take them as an itemized deduction for medical expenses, which is advantageous because itemized medical deductions are limited to expenses paid in excess of 7.5% of your adjusted gross income in the tax year 2022.

    Choosing An Hsa Administrator

    Should You Max Out Your HSA?

    If you don’t have an HSA through an employer, you can open your own account through many financial institutions. The options have improved over the years, so you can shop around for the best HSA administrator for you.

    That means an institution that offers investment options that match your risk tolerance.

    Even if you’re self-employed, you can reduce your taxable income by paying health insurance premiums out of pocket and saving the HSA funds for the future.

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    Health Savings Accounts Offer Big Tax Benefits Now And In Retirement

    Most people are familiar with vanilla retirement savings accounts: individual retirement accounts , and those an employer offers, such as a 401. Many savers also contribute to a Roth account, the after-tax alternative to the traditional IRA and 401 plan. But theres another type of retirement account that can be just as valuable. Are you missing out on the significant tax breaks of a health savings account ?

    This lesser-known cousin of the IRA and 401 is a versatile tool that can deliver a big boost to savers finances throughout their working years and after retirement. Theres a catch, though only taxpayers with a high-deductible health plan that is HSA compatible are eligible for this kind of medical retirement account.

    Hsa Triple Tax Advantage

    Now that you know a bit about the basics of an HSA lets dive into the unique advantages. Heres a closer look at the HSA triple tax advantage.

    Tax-free contributions. The first tax advantage youll encounter through your HSA is that your contributions can be made tax-free. You might already be familiar with this type of tax advantage if you contribute to a 401 or traditional IRA.

    Essentially, the funds you contribute to an HSA will be deducted from your taxable income for the year.

    For example, lets say that you earned $50,000 in 2022. But you contribute $3,500 to your HSA. With that, your taxable income for the year would be lowered to $46,500.

    A lower taxable income means a lower tax liability. So, tucking funds away into this account means your tax burden will be lower.

    Tax-free growth. Next up, the funds you tuck into your HSA will be allowed to grow tax-free. Any investment growth or accumulated interest on your balance will be tax-free.

    Depending on your investment strategy and your contributions, this tax-free growth could dramatically impact the balance of your HSA. Plus, there are no required minimum distributions each year.

    With that, you can grow your HSA account every year. Of course, if you run into a medical issue, the account balance will take a hit. But thats what its there for! An HSA should be there to tap into when you have healthcare-related expenses to cover.

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    Consider The Bigger Financial Picture

    Most HSA providers allow account holders to invest their holdings once they reach a certain balance. Just as you have a limited set of investment options to choose from in most 401s, your HSA provider typically offers a predetermined list of investments. Your Financial Advisor can help you select the best choices from the providers menu.

    If you arent satisfied with the investment options or fees in the HSA offered through work, you can shop around and put money into an outside HSA plan. Keep in mind, though, that going with a different HSA account means your employer wont automatically deposit the money tax-free on your behalf or pay any administrative fees for maintaining the account, and your contribution will be subject to Social Security and Medicare tax. Youll have to fund the HSA with after-tax dollars throughout the year and then reconcile it on your tax return at the end of the year.

    Of course, your HSA is just one piece of a bigger picture when it comes to your financial life. Decisions about whether to put money into an HSA, how much to save and when to use that money, should all fit into that bigger picture. Talk with your Morgan Stanley Financial Advisor today about how you can save for an optimal retirement and cover health-care costs later in life.

    Next Steps To Consider

    Why I

    This information is intended to be educational and is not tailored to the investment needs of any specific investor.

    Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

    Keep in mind that investing involves risk. The value of your investments will fluctuate over time, and you may gain or lose money.

    Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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    Health Savings Account And Hdhp

    High-deductible health insurance means you risk having high out-of-pocket costs if you need health care during the year.

    An HSA helps you set some money aside to pay those out-of-pocket expenses. This even includes over-the-counter medication. You can also use money in the HSA towards paying your health insurance premiums.

    This approach might be appealing if you dont typically have a lot of medical expenses from year to year. Its still important to have health care coverage in case something unexpected happens. An HDHP allows you to get that coverage while paying lower premiums than you would for a health insurance plan with lower deductibles.

    How Do I Get Reimbursed From An Hsa Account

    The short answer is, send in a receipt to your HSA provider and you’ll get reimbursed for the expense.

    There are many companies offering HSA accounts, and their procedures vary. The best HSA providers make it easy for you to open an account, pay money into it, keep on top of your available balance, and get money out of it.

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    When Choosing A Family Hdhp For A Non

    Deductible HSA contributions that come with HDHP coverage are an attractive feature given the upfront tax deduction, ongoing tax-deferred growth, tax-free withdrawals used for qualified medical expenses, and potential tax savings from payroll contributions . The value they add can sometimes make the choice of a healthcare plan lean heavily in favor of an HDHP, especially for healthy individuals and when multiple family members can open and contribute to an HSA.

    Example 3: Mary and Steve are married and have one 19-year-old daughter, Wendy. The whole family has HDHP coverage provided by Mary and Steves employer, Kensington Gardens Nursery.

    Wendy recently got her first full-time job and is able to provide all of her own support. Because her own employer does not offer HDHP coverage, she opts to stay on her parents health insurance plan because she wants to open an HSA account to start saving for future medical expenses. She contributes $5,000 to her HSA, and her parents gift her an additional $2,300 to maximize her contributions for the year.

    When they file their income tax returns, Wendy can make an above-the-line deduction of $7,300 for her HSA contribution , and Mary and Steve, who file jointly, can also deduct $7,300 for the contributions made to their HSAs.

  • How much are the premiums and deductibles?
  • What are the expected annual healthcare costs
  • What is the participants tax bracket and, if they can contribute to an HSA, what are the expected tax savings?
  • The Impact Of Hsa Eligibility On A Familys Healthcare Plan Choices

    Health Savings Account :TaxSlayer Tax Tips| TaxSlayer.com

    Choosing the best healthcare plan can be a difficult decision for many households. Important factors like expected healthcare costs, deductibles, and premiums all weigh into the choice however, an additional factor to consider for some individuals will be the availability of an HSA for their eligible children through their healthcare plan. And now that children can be covered by their parents healthcare plan until they reach age 26, this factor makes the use of HDHPs even more compelling for certain families with young adults under age 26 still in the household.

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    Implementing Hsa Strategies For Clients With Adult Children

    The logistics of opening an HSA for clients are relatively simple: the advisor can either open one on behalf of the client or provide instructions to the client that explain what they need to do to sign up on their own with any number of low-cost options available online.

    Some important factors for advisors to consider when helping clients find HSA providers include annual fees , minimum opening contributions, account minimums for investment , and the menu of investment options . The growth difference between a diversified investment portfolio and an account kept in cash is dramatic, so ensuring that an HSA provider allows for investing inside the plan is imperative to take advantage of the full tax benefits of an HSA.

    For instance, Fidelity HSAs have no fees or minimum contributions to open the account, and options for either a self-directed brokerage account or a Fidelity-managed account .

    While there is a wide range of commission-free ETF options to choose from on the Fidelity platform, some transactions may involve trading fees. Lively HSAs are another option that require no monthly fee or cash minimum for individuals to open an account. Like Fidelity, there is an option for a self-directed HSA or an HSA Guided Portfolio .

    You Cant Invest Your Fsa Funds

    One of the lesser-known benefits of an HSA is that you can invest those funds into good growth stock mutual funds. Because FSA funds have a 12-month lifespan, you lose the investment opportunityand the tax benefitswith an FSA. Without the investment piece, choosing an FSA means losing out on tax-free interest and earnings.

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