An HSA (or Health Savings Account) has three separate tax advantages that make it an important saving (and even investing) option for employees who have access to them.
HSA contributions lower your income that is taxed each year.
The first tax benefit is similar to one also provided by a 401(k). The dollars you contribute are tax-deductible (or pre-tax if you contribute via payroll deduction). That means contributions, up to a limit, reduce your taxable income and therefore your tax bill.
Money in your HSA grows tax-free.
You can invest the money in your HSA. Whether it’s simple interest or investment returns, the growth on money in your HSA isn’t taxed.
“Qualified” distributions aren’t taxed either.
This is the biggest difference between the tax treatment of an HSA and a 401(k). In a 401(k), you get the first two benefits also, but when you withdraw the money in retirement you do pay taxes as if it were ordinary income.
With an HSA, withdrawals spent on qualifying medical expenses aren’t taxed either! Your provider will have a list of these qualified expenses, but that means you can save a lot of money on health care expenses because you don’t have to pay taxes on them.
A key feature of HSAs, as opposed to Flexible Spending Accounts (FSA), is that carryover is generally unlimited from year to year.
That means dollars you contribute this year don’t “expire” if you don’t use them, while FSA dollars will be lost if you don’t use them within a calendar year.
If you’ve got access to a high-deductible plan with an HSA option, this is a benefit definitely worth considering as part of your overall financial wellness plan!
Talk to your BrightDime coach to learn more about how to take advantage of these savings and include it in your financial goals.