Health Savings Accounts can be the ultimate tax savings tool as they offer triple tax savings if used properly. First, all contributions are tax deductible. Second, all gains while in the HSA are tax-free. And third, as long as you pull out the money for a qualified medical expense – which you are almost certainly going to have – the distributions are tax-free as well.

A little-known fact about an HSA is that you can distribute money from the plan for all qualified medical expenses incurred since the account was opened. Also, you do not have to reimburse yourself for the expenses in the year that they occur and you can let the reimbursable amount accrue over your lifetime.

If you think of the total amount of money you have to save as a waterfall, this would be one of the first pools to fill. To best utilize the tax savings, you should put as much money in your HSA as you can, but don’t take the money out to reimburse yourself for current medical expenses. This takes advantage of the tax-free growth. There is also fully liquid access to the amount of money in your HSA that you have paid out of pocket for any medical expenses in the event of an emergency.

If you don’t have the money to contribute to your HSA, but you are in an HSA eligible plan, you can still benefit from the account. You should open the account immediately if you haven’t already. If you had $3,000 in medical expenses in the current year, you could contribute $1,000 then take the money out, then contribute that $1,000 again and take the money out, and then do it one last time, to have a contribution that totals $3,000. Thus, making all of your medical expenses tax deductible. You have the ability to make these contributions up until the filing deadline of April 15th for the prior tax year.

Investing the money in your HSA is one of the key advantages. If your company’s HSA provider doesn’t offer investment options in your HSA, you can always roll the HSA balance over to an HSA bank that does offer you an investment account and there is no penalty or restriction from doing this. As long as its a direct trustee-to-trustee transfer, you can even do it multiple times a year.

To qualify for an HSA you must be in a high-deductible health plan. Most plans specify if you are in a high-deductible plan or not. However, a high-deductible health plan for 2018 is defined by the IRS as, “any plan with a deductible of at least $1,350 for an individual or $2,700 for a family.” If you fall under this umbrella, then you should open an HSA immediately.

The contribution limits for an HSA are determined if you are a family or a single individual. You are considered a family if you cover anyone else under your health insurance besides yourself. For 2018, if you are single you have a contribution limit of $3,450 and if you are in a family plan, your contribution limit is $6,850. There is also a $1,000 additional catch-up contribution if you are 55 years or older.

Lastly, if a child is still under their parent’s health insurance because they are 25 or under, they can actually benefit from the HSA as well. As long as the child
provides support for themselves and claims themselves on their personal tax return, they can contribute the family maximum $6,900 to their own HSA independent of whatever their parent’s do. This is a great opportunity for parents to put thousands of dollars a year into tax-deferred accounts for their children that they can later use for medical expenses tax-free.

Written by Garrett Gould

Garrett Gould is a remote financial planner who specializes in long-term tax management. He is the co-owner of Halyard Financial and advises individuals, families, and small business owners throughout the nation. Garrett is an Enrolled Agent with the IRS who has passed all three of the CFA exams and has been creating financial plans for several years. Garrett is located on the Upper West Side in New York City.

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