Health Savings Accounts (HSAs) offer a less known, but very appealing option for our retirement savings. They have several tax advantages, as long as we spend the funds in the account on qualified medical expenses. HSAs are linked to high-deductible health plans. A higher deductible means lower premiums, so we can put the premium savings into an HSA.
If we have medical expenses that year, we can use the pre-tax money in our HSA to pay the costs up to the deductible. But if we don’t, the money in the account can be invested in something like mutual funds, where it grows year after year. In short, instead of paying money to the insurance company as premiums and then not using the insurance, we hold the money in an account in our name, and we use it if needed. If not needed, it becomes part of our investment savings.
Here are the four tax advantages of an HSA:
- We can contribute to them on a pretax or tax-deductible basis
- Our savings grow free of taxes over time
- We can make tax-free withdrawals to cover qualified medical expenses
- Our pretax HSA contributions also avoid Social Security and Medicare taxes, often known as FICA taxes (Federal Insurance Contributions Act). The same applies to contributions our employer makes to our HSA, amounting to a shared savings of about 15.3%
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