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Supercharge Your Health Savings Account

May 20, 2021

I find myself often talking or writing about the many powerful benefits of a Health Savings Account (HSA).  Here is a quick refresher on some of those benefits:

  • Contributions are tax deductible.
  • Any growth inside of the account is tax deferred.
  • Any withdrawals for qualified medical expenses are tax free.

This is the triple tax advantage that HSA’s can offer, and this graphic below helps display these advantages HSA’s have – even over retirement accounts like an IRA or Roth IRA.

1) Source: Michael Kitces at Nerd's Eye View

I want to take the power of an HSA one step-further, with a way to maximize how to make your contributions.  When contributing to an HSA, you typically have two options:

  1. Make contributions directly to your HSA. These contributions are made with after-tax dollars and become tax deductible for that tax year.
  2. Make contributions through payroll deductions. Each paycheck, your employer withholds an amount of your choosing to be sent to your HSA – these contributions are made with pre-tax dollars. 

Both options reduce your taxable income which ultimately helps your tax bill.  But wait there’s more!  Option 2, making contributions through payroll, not only reduces your taxable income but will also save you on payroll taxes!  As a reminder, payroll taxes are the mandatory 7.65% employers must withhold from your pay (up to a certain amount).  These taxes go towards funding the Medicare and Social Security programs.  The added savings on payroll taxes are something to consider and sweeten what is already a great deal if you are eligible and contributing to an HSA. 

Here are a couple considerations if you are going to contribute to or are considering an HSA:

  • Double check that you are eligible to contribute.
  • Double check with your employer that they offer the ability to contribute pre-tax through payroll contributions. (Often times this means you must use an HSA provider that your employer has already selected).
  • How much can you afford to contribute? For 2021 you can contribute up to $3,600 as an individual or $7,200 for family coverage.
  • What works best for your cash flows? Sure, contributing pre-tax through payroll may come with an added tax benefit, but does that work in your budget?  Do you prefer to contribute directly to your HSA at different times during the year – using things such as a bonus or other sporadic sources of income to fund contributions?  If you have a system in place that works for you, it may not be worth throwing off your routine!

Give the team at Stonegate Financial a call if you want to talk more about how to make the most of your Health Savings Account!

HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds are tax-free with very few exceptions. Please consult a tax advisor regarding your state's specific rules.