Looking for a way to save more tax dollars before filing your tax return? Be sure to max out the triple threat of tax-savings vehicles—the Health Savings Account (HSA). You can make your 2020 contributions until April 15, 2021. (Note that since the publishing of this blog, the IRS moved the contribution deadline to May 17.)
Most who contribute to HSA accounts actively use the funds for medical expenses, but there’s power in using your account for long-term strategy.
Three Benefits of a Health Savings Account
- Paying medical expenses tax free–You can use your HSA funds to pay for medical and some over-the-counter expenses tax-free.
- Building the account for future growth—You DON’T HAVE to use the funds for medical expenses. Position the account for long-term growth by contributing annually, not withdrawing funds, and investing it for long-term, tax-free growth. Over time, you’ll build a source to cover large, unexpected future medical expenses.
- Developing a supplemental retirement account—You can always access the fund tax-free for medical expenses, but after age 65, you can also use it for living expenses. You’ll pay income tax, but no penalties.
Many employers match your HSA contributions. If your employer does, you should absolutely take advantage of this benefit. Never leave free money on the table!
If you choose to allow your account for the long-term, know that you never have to access the account if you don’t want to. You can leave it to beneficiaries as part of your estate plan. If you leave it to a spouse, it becomes their health savings account tax-free. However, if you leave it to any other heir, it is converted to a taxable account and the assets will be taxed. Keep this in mind when determining the role of this asset in your overall financial strategy.
Contributing to your Health Savings Account
To make HSA contributions, you have to be enrolled in a single or family high deductible health plan (HDHP). This is a special kind of insurance plan with lower premiums, but higher deductibles than a typical plan. Often, the ability to contribute to the HSA and availability of an employer match make these plans attractive, but consider your normal health care costs when deciding if this is the right plan for you.
Your HSA contribution limit depends on the type of HDHP you’re enrolled in. The total 2020 contribution limit if enrolled in a single HDHP plan is $3,550, and it’s $7,100 for a family plan. The limits for 2021 are $3,600 and $7,200 respectively.
If you were enrolled in an HDHP in 2020 and have not maxed your 2020 contribution, you can do so until April 15, 2021 and increase your tax savings and long-term growth. (Note that since the publishing of this blog, the IRS moved the contribution deadline to May 17.)