October 24, 2017

How to Maximize the Tax Benefits of Your Health Savings Account

A Health Savings Account (HSA) provides an avenue to save and invest money for current and future qualified medical expenses (QMEs). Once you decide that an HSA is the best choice for you, learn why and how to incorporate it into your retirement planning strategy.

Why invest with an HSA?

Money contributed to an HSA is tax-free and distributions for QMEs are also tax-free. Once your HSA account balance reaches a certain amount, you may have the option to invest funds over that amount. That amount is determined by each custodian, typically $2,000, but could be higher or lower. If you choose to invest the funds in your HSA, future earnings from your investment are also tax-free as long as distributions are used towards QMEs.

Spend less on health expenses

HSAs provide a huge benefit over other retirement plans such as a 401(k). The annual contributions to an HSA account are much lower than the amount you can contribute to a 401(k). This allows you to invest your HSA in low-cost assets to help gain greater profits and spend even less out-of-pocket health care expenses.

Avoid capital gains tax

By contributing and investing the maximum amount in your HSA, you not only avoid federal and state income tax, but any future earnings from your investment are exempt from capital gains tax as long as funds are used for QMEs. If your income is greater than $200,000 for single or head of household filers and $250,000 for married filers you will save an additional 3.8% from the net investment income tax on your earnings as part of the Affordable Care Act.

Withdraw funds at age 65 without penalty

After you reach the age of 65 you can withdraw funds from your HSA account for non-qualified expenses without incurring the 20% penalty. You would be subject to income tax on the distribution just like distributions from an IRA or another qualified retirement plan.

Self-directed HSA

With the influx of HSA providers and advancements in technology, many HSA providers are now offering self-directed HSAs. This allows you to invest in an array of low-cost assets that could potentially bring larger returns. Besides investing in the securities market, you could invest in other markets such as private equities, real estate, or even consumer loan listings.

When you consider potential investment earnings you should start to think of your HSA as another retirement account. Contact an Anders advisor to learn more on how you can maximize your HSA.


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