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Put Money Away Before Taxes, Grow It Tax-Free, and Withdraw It Tax-Free: The Triple Tax Tactic HSA Accounts

HSA accounts blow Roth and traditional IRAs out of the water and can be one of the best retirement planning tools. Hi, I’m Hunter Brockway, founder of Boer Retirement Strategies, here to guide you to a successful, stress-free retirement while spending more and avoiding being killed in taxes.

What Makes HSAs Special?

HSAs, or Health Savings Accounts, are tax-advantaged accounts designed specifically for healthcare costs. What makes HSAs so special is their triple tax advantage: contributions go into an HSA pre-tax, growth inside of the HSA is free of tax, and distributions on qualified healthcare expenses are tax-free.

The Downsides of an HSA

Under IRS rules, you can open and contribute to an HSA only if you are enrolled in a high deductible health plan. Hopefully, you have quality health insurance and this doesn’t apply to you, but if it does, take the silver lining of being able to utilize an HSA. These health plans tend to have relatively low premiums and high out-of-pocket expenses, which the HSA may help offset.

High Medical Expenses and HSA Benefits

HSA funds remain in your account and are not required to be spent. Growth in investments is tax-free and, even if you switch to a health plan that is not high deductible, although you cannot continue to contribute to your HSA, you can still spend it tax-free on qualified medical expenses.

For calendar year 2024, the annual limitation on HSA contributions for individuals with self-coverage under a high deductible health plan is $4,150. For individuals with family coverage, it is $8,300. Those aged 55 and older can contribute an additional $1,000 as a catch-up contribution.

Qualified Medical Expenses and Tax Reporting

Qualified medical expenses generally include expenses for medical care as defined by the IRS, such as doctor visits, prescription medications, and certain medical supplies. Keeping thorough records of your HSA transactions and expenses is essential for tax reporting purposes.

A Unique Strategy with HSAs

Let’s say that while contributing to an HSA you incur a qualified medical expense of $10,000. Instead of paying that expense out of your HSA, you decide to pay for it out of your savings account and let the money inside of your HSA continue to grow tax-free. Because you’ve maintained meticulous records, you could withdraw that $10,000 years down the road, after it grew to much more. If you don’t use your HSA distributions on qualified medical expenses, they become taxable and if you are under age 65, unless you become disabled, a 20% penalty applies. But after 65, that 20% penalty goes away.

Action Steps

Review your healthcare plan to find out if you are eligible to contribute to an HSA. Remember to report any after-tax contributions to your HSA on IRS Form 8889 with your tax return and monitor your basis each year to avoid double taxation.

Lastly, subscribe to our YouTube channel if you would like to learn more about the tax strategies we review and implement for our clients. You can schedule a brief phone call on our website at BocaRetirement.com or email us at contact@BocaRetirement.com. Enjoy your successful retirement, and thank you for watching. Bye.