HSA The Super Account
The Rodney Dangerfield of the tax-advantaged account world - finally going to give 'em some respect
Health Savings Accounts (HSAs) are one of the most slept on accounts out there.
Contributions are tax free
Growth is tax free
Withdrawals are tax free (for qualified medical expenses)
If you’re keeping score at home that is a triple tax-advantage on the account. There is no other easily accessible account that gives you a triple tax advantage like an HSA does. IRAs don’t. 401Ks don’t. Roth accounts don’t.
Which is why we think of HSAs as the Rodney Dangerfield of accounts, despite being the best around, it just don’t get no respect.
What is an HSA and how can you take advantage of this super account.
What is an HSA?
Heath Savings Accounts have been around since 2004. HSAs were established in federal law in 2003’s Medicare Prescription Drug Improvement and Modernization Act. They are modeled after Medical Savings Accounts (MSAs) and Archer MSAs which have been around since the mid-1990s.
HSAs are owned by the individual (whereas a 401k is owned by the company…you did know that right Anon?). That means HSAs are portable from job to job, they also never expire (unlike Flexible Savings Accounts which follow a “use-it or lose-it” rule).
However, HSAs must be tied with the election of a high-deductible health plan.
As mentioned in the intro, HSAs give you triple tax-advantage. You can put in money pre-tax (pre-tax pay roll deductions), that money can be put into investments (similar to 401k) and grow tax-free, and if used for a qualified medical expense, you pay no tax on the full withdrawal. This is the only account that you get full triple tax-advantage on.
However, there is a max contribution per calendar year. Right now is a good time since IRS just announced boosted up contribution limits for 2023. Individuals can contribute $3,850 (up from $3,650 in 2022) and families can contribute $7,750 (up from $7,350 in 2022). Additionally, after age 55 you can make additional $1,000 bonus contributions every year (‘catch-up’ contributions).
[Note - limit increases are based on inflation, so ‘good time’ in the sense of the limit is up, not a good time in the broader sense of society being economically sound]