When you envision your personal dream of a perfect life, you most likely picture yourself somehow fitting into the old adage of being “healthy, wealthy, and wise.”
But the question always remains: how do we get to be “healthy, wealthy, and wise?”
Believe it or not, there are ways to start saving up so that you can benefit both your health and your wealth.
A health savings account (HSA) brings you the best of both worlds, allowing you to build yourself up financially while staying ahead on your medical expenses and health care costs at the same time.
Keep reading to find out how you can get a tax deduction with health savings accounts.
What is an HSA?
Whether you’re already somewhat familiar with the concept of an HSA or not, you may not be entirely sure of what it does in financial terms.
As its name implies, an HSA is a type of medical savings account that accepts regular contributions from either you or your employer.
The contributions can be made from your pre-tax income and are meant to be used to pay for qualified healthcare expenses.
As long as the funds are being used for qualified medical expenses, then the money comes out just as tax-free as when you put it in!
How to Contribute to an HSA
In order to be eligible to open an HSA, you must be enrolled in a High Deductible Health Plan (HDHP).
In the context of a healthcare plan, a deductible is the amount of a certain medical expense that you (the insured) has to pay directly without the assistance of the insurance company.
The insurance company will then cover whatever amount is left over.
HDHPs have high minimum deductibles, which can quickly eat away at your savings if you’re not careful.
For that reason, only those who have high deductible health plans can open an HSA, as it can be extremely helpful in paying off those high deductible amounts.
If you have an HDHP and are not currently enrolled in Medicare or any other type of health coverage, then you’re ready to start making contributions to your HSA.
Contributions can also be made by your employer or relatives, but the total amount of annual contributions to your HSA cannot exceed the limit set by the IRS for that year.
The current contribution limit for 2021 is $3,600 for individuals and $7,200 for families, with an additional $1,000 catch-up contribution available to those over 55.
When making contributions to your HSA, you can do so electronically through your trustee’s website or by mailing a check.
If contributions are offered through your employer, then they will likely be in the form of payroll deductions just like your health insurance premiums.
Benefits of Contributing to an HSA
HSAs are particularly advantageous from a tax perspective.
Remember, your contributions are usually drawn from pre-tax income that comes directly out of your payroll.
In the future, when you pull money back out of the account, that money remains completely tax-free as long as it is being used to pay for qualified medical expenses.
Not to mention, the interest and other earnings that accumulate in the account over time are free from taxes as well.
So essentially, HSAs provide an entirely tax-free way to lower your healthcare costs while growing your wealth at the same time.
Another added benefit of HSAs is that you have the ability to claim tax deductions simply by contributing to them.
When you make contributions manually with after-tax dollars rather than pre-tax income from your payroll, you are free to deduct that amount from your gross income report for the year on your tax return.
This, of course, will result in a lower tax bill, thus saving you a chunk of cash to be used elsewhere.
HSA’s can become part of your retirement planning and investment strategy because the account balance can be invested to earn additional health savings just like any other investment account.
If your HSA funds are with your employer, you can typically invest in the same mutual funds and index funds available in your 401(k).
If you open your own HSA with a platform like Fidelity, then your HSA money can be invested in individual stocks just like we teach here at My Money My Freedom.
HSAs are extremely convenient as well.
The contributions that you make to the account will remain there until you use them, no matter how long that may take.
So, even if you don’t have much to worry about in the way of healthcare expenses at the moment, your HSA contributions will always be ready down the line in the event that you do need them.
Your HSA is also portable, which means that it will stick with you between different jobs and employers and even when you retire.
And there you have it, a complete rundown on how you can make the most of an HSA!
If you’re looking for a tax-free way to grow your wealth while also having the freedom to use your money for medical expenses, consider opening an HSA.
It may just be the perfect choice for you.