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The Health Savings Account: An Often-Overlooked Tool to Reduce Your Income Taxes

The go-to method for lowering annual income taxes for most people is to maximize retirement savings in a qualified retirement plan, such as a 401(k) or 403(b). However, another way to reduce your annual income tax liability — and save for future health care costs — is by participating in a Health Savings Account (HSA).

An HSA is a triple tax-advantaged account that works as a personal savings account to be used for qualified health care expenses throughout your life. Your contributions are tax-deductible (or pretax if you contribute through your employer), the money grows tax-deferred, and you can use it tax-free for eligible expenses at any time.

Benefits of Using a Health Savings Account

Everyone has qualified health care costs. A single injury, broken bone, diagnosis or emergency room visit can cost you and your family thousands in one year. The savings that builds up in the account can pay these bills in the future when incurred.

Additionally, suppose you are healthy now and rarely use qualified medical services. In that case, you can save a substantial tax deferred balance in the HSA that can be used toward medical expenses later in life. Further, you can use withdrawals from a newly created HSA to pay outstanding medical bills from past procedures.

In addition to being able to use HSA funds to pay for health care costs incurred in the past, now and in the future—you can also reap these tax benefits:

  • All contributions made to your HSA are either pretax or tax-deductible, and the money within the account grows tax-free.
  • When the time comes to make qualified medical expenses, the money used is tax-free, as well. Withdrawals for qualified medical expenses are exempt from federal, state and local taxes. This can make a big difference in your taxable income depending on how much you earn and how close you are to a high tax bracket.
  • The Schedule A on your tax form has an initial requirement that all medical bills must surpass 10% of your adjusted gross income before you can begin deducting medical expenses. HSA withdrawals do not have such limitations.
  • Lastly, funds in HSAs are versatile, as the money can be invested in stocks, bonds and mutual funds to grow in value while the money is in the account.

    How to Create and Contribute to an HSA

    To create an HSA and make contributions, you must participate in a High Deductible Health Care Plan (HDHP) through your employer or buy your own HDHP that is “HSA eligible.” You can contribute to an HSA through your employer or directly with a provider.

    Many employers offer an incentive to open an HDHP and HSA by contributing money to your HSA. This is tax-free money to you but is included in your maximum annual allowed contribution. Again, you can contribute to an HSA if you participate in an HDHP and are not enrolled in Medicare (Medicare eligibility generally begins at age 65). You can make a tax-free withdrawal from a previously created account at any time to cover your qualified medical expenses and insurance deductibles.

    For 2021:

    • You can contribute a maximum of $3,600 for an individual HSA and $7,200 for a family HSA, and if you are over age 55, you can contribute an extra $1,000 as a “catch up.”
    • You have until April 15, 2022, to complete your 2021 tax-deductible contributions.
    • For 2022:

      • You can contribute a maximum of $3,650 for an individual HSA and $7,300 for a family HSA, and if you are over age 55, you can contribute an extra $1,000 as a “catch up.”
      • You have until April 18, 2023, to complete your 2022 tax-deductible contributions.

      The Health Savings Account is a tool that can help you pay for future medical expenses in the most tax-efficient way possible. A CFP® professional can walk you through creating an HSA and all the financial benefits that you can reap from it. More information on HSAs can be found at

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