Maximizing Benefits with an HSA Plan: Why Every Taxpayer Should Utilize Their HSA with a High Deductible Health Plan

Health Savings Accounts (HSAs) are an increasingly popular choice for taxpayers, especially those enrolled in High Deductible Health Plans (HDHPs). These accounts offer a trio of tax advantages: contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Beyond these immediate benefits, HSAs provide a versatile financial tool that can help individuals save for future healthcare costs and even assist in estate planning. Here’s why every taxpayer should consider maximizing their HSA alongside an HDHP.

1. Tax-Deductible Contributions

One of the most compelling reasons to utilize an HSA is the ability to make tax-deductible contributions. For the tax year 2024, individuals can contribute up to $3,850, and families can contribute up to $7,750 to their HSA. Additionally, those aged 55 and older can make an extra $1,000 catch-up contribution. These contributions reduce your taxable income, lowering your overall tax liability. For example, if you’re in the 22% tax bracket, contributing the maximum amount as a family could save you approximately $1,705 in federal taxes alone.

2. Tax-Free Growth

Once you’ve made contributions to your HSA, the funds grow tax-free. This means that any interest, dividends, or capital gains earned in the account are not subject to federal taxes. Unlike other retirement savings accounts such as 401(k)s or IRAs, you won’t have to worry about paying taxes on the growth of your HSA investments. This allows your savings to compound more efficiently over time, providing a significant financial advantage, especially if you start contributing early and consistently.

3. Tax-Free Withdrawals for Qualified Medical Expenses

HSAs also offer the benefit of tax-free withdrawals, provided the funds are used for qualified medical expenses. These expenses can include doctor visits, prescription medications, dental care, vision care, and even some over-the-counter medications. By using HSA funds to cover these costs, you effectively pay no taxes on the money you contribute, earn, or withdraw, maximizing your healthcare spending power.

4. Unused Funds Can Pass to Your Child’s IRA

One of the lesser-known benefits of HSAs is their flexibility in estate planning. If you don’t use all the funds in your HSA by the time you pass away, the remaining balance can be transferred to a designated beneficiary. If your beneficiary is your spouse, the HSA becomes their own, and they can continue to use it tax-free for qualified medical expenses. If your beneficiary is someone other than your spouse, the HSA is no longer an HSA, and the fair market value of the account is taxable to the beneficiary in the year of your death. However, they can still use the funds to pay for your outstanding medical expenses tax-free, up to a year after your death.

Moreover, any unused HSA funds can potentially pass to your child’s Individual Retirement Account (IRA). This can provide them with a tax-advantaged start on their own retirement savings, demonstrating the HSA’s long-term value as both a health savings tool and a component of your legacy planning.

Conclusion

HSAs offer a unique combination of tax benefits that make them an attractive option for taxpayers, especially those with HDHPs. By taking advantage of tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses, you can significantly reduce your healthcare costs and overall tax liability. Additionally, the ability to pass unused funds to your child’s IRA adds an estate planning benefit, ensuring that your savings continue to provide value beyond your lifetime. For these reasons, every taxpayer should consider maximizing their HSA contributions to secure both their current and future financial well-being.

Unlock unparalleled tax savings with Torino Accounting Group, your dedicated small business tax advisors. We specialize in HSA planning and over 80 other tax strategies. Schedule a consultation today to discover how we can help you reduce your individual and business taxes.