Motley Fool Contributor
Published on: February 11, 2020
Let’s find a tax preparation office for you
Oh no! We may not fully support the browser or device software you are using !
To experience our site in the best way possible, please update your browser or device software, or move over to another browser.
If you're on a high-deductible health insurance plan and have the opportunity to participate in an HSA, it pays to capitalize on it. Here are a few reasons why.
HSAs are triple tax-advantaged. The money you contribute goes in on a tax-free basis so that the IRS can't tax you on that portion of your earnings. Then, the money in that account that you don't need immediately can be invested for added growth, and any gains that result are tax-free as well. Of course, the longer you leave that money invested, the more you'll benefit in this regard. Finally, HSA withdrawals can be taken tax-free as long as they're used for qualified medical expenses. Talk about a triple win.
When you put money into a flexible spending account, or FSA, you're generally required to use up your balance by the end of your plan year or else risk forfeiting the difference. HSA funds, however, don't expire. You can fund an HSA in your 30s and carry that money all the way into retirement. And that's important because healthcare is the one expense that tends to climb for retirees, and having a dedicated source of cash to cover it could save you a world of financial stress when you're older.
Just as it's common practice for companies to match 401(k) contributions among participating employees, so, too, do many employers put money into HSAs on their workers' behalf. Often, these contributions aren't made in the form of a match but, rather, as a pre-designated sum. Signing up for an HSA could therefore result in extra funds to pay for healthcare that don't actually come out of your own pocket.
To qualify for an HSA in 2020, you'll need a health insurance plan with a deductible of $1,400 or more if you have self-only coverage. If you have family coverage, that deductible will need to be at least $2,800.
Assuming you qualify, you'll be allowed to contribute up to $3,550 in 2020 as an individual or up to $7,100 as a family. And if you're 55 or older, you can make an additional $1,000 catch-up contribution on top of whichever limit you qualify for. Any amount you put into your HSA is money the IRS can't tax you on, so it pays to aim to max out if you can. That said, if your employer does put money into that account for you, it counts toward your annual contribution limit, so keep that in mind as you make your funding election.
About the Author
Jackson Hewitt is partnering with Motley Fool to offer content about taxes, saving, and other financial topics that could help clients get ahead and stay ahead."Have a High-Deductible Plan at Work? Chances are, You Get this Benefit, Too"by Maurie Backman was originally published October 22, 2019.