Love Tax Savings? Then This Account Is the Right One for You

Taxes may be a part of life, but that doesn’t mean we have to like them. In fact, many people go out of their way to employ strategies to (legally) shield income from the IRS. If you’re not a fan of paying taxes, then there’s one account you should definitely seek to contribute to — that is, if you’re allowed.

Three different tax breaks

Many people are familiar with the tax breaks offered by savings plans such as traditional and Roth IRAs and 401(k)s. But there’s one account that actually offers three distinct tax benefits — health savings accounts, or HSAs.

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An HSA allows you to set aside money for qualified medical expenses like prescriptions and copays at the doctor. But the great thing about an HSA is that you don’t have to spend down your plan balance every year like you do for a flexible spending account (FSA). Rather, you can invest funds you don’t need immediately and carry them forward into the future — for example, reserve them for retirement, when your healthcare costs might really start to soar.

So let’s talk about the tax breaks you’ll get with an HSA. First, there’s the fact that contributions go in with pre-tax dollars. Put $2,000 into an HSA, and that’s $2,000 of income the IRS won’t tax you on.

Next, there are investment gains. As is the case with a Roth IRA or 401(k), if you contribute $100,000 out of pocket but your balance doubles over time as a result of your investments, you won’t pay taxes on that additional $100,000.

And finally, HSA withdrawals are tax-free as long as they’re used to cover qualified healthcare expenses. To be clear, you’ll actually face steep penalties if you take an HSA withdrawal for non-medical purposes, though that rule is relaxed once you turn 65.

Can you fund an HSA?

At this point, HSAs are probably looking pretty great. There’s just one problem — your health plan needs to be compatible with an HSA for you to participate in one. And if you don’t qualify based on your health plan, there’s really no getting around that.

If you earn too much money to fund a Roth IRA directly, for example, you can always go the backdoor route and convert a traditional IRA to a Roth. But there’s really no such thing as a backdoor HSA.

Meanwhile, the requirements for HSA-compatible health plans change annually. Right now, you’re able to fund an HSA if your health insurance plan:

Has a minimum individual deductible of $1,400 or family deductible of $2,800
Has an out-of-pocket maximum of $7,050 for individual coverage or $14,100 for family coverage

That said, while your health plan may not be HSA-eligible this year, that could change next year. Or, you may have the option to elect a different plan if you get health insurance through your employer, so that’s something worth looking into.

Don’t pay the IRS a penny more

You work hard for your money, so wouldn’t you rather keep more of it away from the IRS? With an HSA, you get three different tax breaks rolled into one account, so if your health plan renders you eligible to participate, it definitely pays to sign up.

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