You have likely 
heard of HSAs, or Health Savings Accounts.
You also may have heard of the “triple tax advantage” HSAs offer. But do you know what the HSA “triple tax advantage” is?
Today I’ll share each of the three tax advantages that HSAs offer that, in turn, coined the phrase “the triple tax advantage.”
But first, if you don’t know what an HSA is, an HSA is a tax-advantaged savings accounts that typically accompany high-deductible health insurance plans. They are becoming increasingly popular to be offered by employers because consumers tend to have favorable views of plans with high deductibles and low monthly premiums instead of low deductibles and high monthly premiums.
Tax Advantage #1 – Money You Deposit is Treated as Pre-Tax
There are a number of things you can do with your money that the IRS does not tax. Charitable contributions and contributions to an IRA are two things that come to mind. HSA contributions are another. Every dollar you contribute to an HSA account is a reduction in taxable income.
There are limits to how much you can contribute in a given year, though. The maximum allowed contribution for 2014 is $3,300 for an individual and $6,550 for a family.
One additional note: these totals include money you contribute to an HSA account and money that your employer contributes. Some employers will automatically put in $500 in your account every year, or will match your contributions dollar-for-dollar up to a certain amount.
Tax Advantage #2 – Qualified Medical Expenses are not Taxed
Once you have money in an HSA account you can use it for what the IRS considers “qualified” medical expenses. Not only can you contribute money tax-free to an HSA, but you can also use the funds without being taxed. Over time this can result in a huge tax savings.
I would list out all the medical expenses that the IRS deems as “qualified,” but it’s a fairly long list. Check out IRS Publication 502 where qualified medical expenses are spelled out.
There are a number of things that don’t fall under qualified medical expenses that you may find surprising. For example, if you suffer from allergies and get over-the-counter (OTC) allergy medication or just get it off the shelf, you will not be able to use your HSA funds. Additionally most common medicine like ibuprofen and cough medicine is not deemed a “qualified” medical expense by the IRS.
With that being said there are a ton of things that do fall under the “qualified” category, such as doctor visits, prescriptions, glasses, etc.
Tax Advantage #3 – Investment Gains are not Taxed
The final tax advantage of the HSA “triple tax advantage” is the ability to invest the money you have in your HSA. For example, if you deposited $3,000 one year and had no qualified medical expenses that required the funds, you could invest it and hopefully see the investments gain value.
As long as you use the funds for qualified medical expenses, these gains are not taxed. That’s another potentially huge tax advantage.
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Because of the “triple tax advantage” that HSAs offer, I highly recommend people contribute the maximum every year. It not only gives you a medical emergency fund, but you are gaining money through the tax benefits you experience.
There are many other benefits of HSAs, such as the fact that you never lose the funds if you switch employers or health plans and the ability to treat it as a secondary retirement account. I explain more in my article 8 Reasons to contribute to an HSA.
Looking to sign up for health insurance? Read our article on How to Get Health Insurance when the Exchanges are Closed or head over to eHealthInsurance.
What do you think about HSAs? Do you have one? Do you plan on getting one in the future?
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Photo by Phalinn Ooi
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Great breakdown DC! We have an HSA ourselves and love it. It’s one of those things you never hope you have to use, but is important to have. I really need to look into investing ours as it looks like we won’t be using anything we put in for the year. I do think it’s a shame that they got rid of the qualified status of many otc medicines though. I’ll take what I can get though. :)
I love your articles on health insurance! Thank you for breaking all this information down. It is really helpful! I don’t have an HSA as we are currently using a more traditional plan that doesn’t offer an HSA. Maybe someday though!
We’re using a HSA for the first time this year, and while we’ve unfortunately had to use pretty much all of our funds in the account up, at least we’re saving on our taxes for health care expenses we would have incurred anyway. It’s gonna mean some decent savings this year!
I have an HSA and I love it for all of the reasons you mention. We do have to have the high deductible plan to qualify for the HSA, but to “hedge” against the possibility of paying our high deductible for the year, we max out our HSA contributions. I love the fact that the funds will roll over to the next year if you don’t use them and that it is portable should you leave your company.
moneymatters I’ve maxed out my insurance the past 2 out of 3 years and between my wife and I this year it’s looking likely we’ll max it out together this third year. While obviously it would be better if you didn’t have to use the funds, at the very least there is significant tax savings for those who do have to use them.
BudgetforMore It’s really the only option at my work. Even though I kind of have it by default, the tax advantages are awesome. I’m glad you enjoy my articles on health insurance, it’s something that I think I know a bit more about than the average person so I’m happy to share my knowledge.
FrugalRules That’s awesome that you won’t have to use any of it this year! I’ts a great emergency fund for future years and a secondary retirement account if the dollars really start piling up. My wife and I both use OTC allergy meds every day so it really is a bummer that they don’t qualify.
blonde_finance I see pretty much no reason NOT to max out HSA contributions. There’s so many advantages. The fact that you never lose the funds is a huge advantage for sure.
I love my HSA, especially for the first two reasons you mention. Currently, I don’t have the guts yet to invest my HSA funds, but those tax free gains are looking quite enticing…
LisaVsTheLoans The tax advantages alone should motivate people to contribute to their HSA on a regular basis.
One other AWESOME benefit to HSA contributions is that they are not only not subject to federal and state tax, but also not subject to FICA taxes. This only applies when the contributions are made through employee payroll deductions, but it saves an additional 7.625% which is a lot for those that can benefit. So in some cases it’s a quadruple tax benefit. HSA accounts are some of the absolute best things you can invest in.