Ever want to watch tax planner’s face brighten? Say these three letters in this order. The letters are H-S-A. It stands for a Health Savings Account. Now, I’m not saying we get too excited here, but it is indeed time to party.
An HSA is the kind of tax tool that is boring (because taxes are boring), but tax planners are tricked into finding these exciting due to the massive potential of tax savings. What do I mean? Let’s break it down into three parts:
Part 1: Contributions
Not everyone can contribute to one of these, but if you can, consider it ample reason to join the party. To contribute, you have to be enrolled in a qualified high-deductible healthcare plan. For just one person enrolled in a high-deductible healthcare plan, the maximum contribution is $4,300 for the year 2025. For family coverage, the maximum is $8,550 for 2025. There are also catch-up contributions for individuals 55 and older. What happens is that the money you put in here is considered tax deferred. It’s as if you were going to be taxed on it, then realized you didn’t want to pay taxes it, so you put it in an HSA so you wouldn’t be taxed on it this year.
Part 2: Withdrawals
The next part is withdrawals. In order for someone to take money out of an HSA free of tax and penalties, it must be used for a qualifying medical expense. Speak to your tax professional on the specific cases, but the IRS makes clear these expenses must be to alleviate or prevent disability or illness. “They don't include expenses that are merely beneficial to general health, such as vitamins or a vacation.” No HSA funded vacation… bummer. Some may be concerned they won’t be able to spend all that they put in their HSA. Allow me to put the concern to rest.Unfortunately, it’s quite likely you’ll have enough medical expenses to spend down your HSA within your lifetime. Think about this: On the way in, the money is tax deferred. On the way out, the money can be tax free. That means you can essentially have tax free income. Feeling ready to join the party? There’s more.
Part 1 and a half: Growth in the meantime
Between part 1 and part 2, there’s the in between time. Not everyone knows the exact date of their next emergency room visit, so it may seem like money is just sitting on the sidelines until then. But this is where we break out the pinata. Any money earned within the HSA can also come out tax free. Did I mention you can invest the money in your HSA into the market? You bet your bottom dollar. Well, sometimes HSAs won’t let you invest all of it in the market, as some must be kept in cash. But for those in a position to allow for tax-free growth, investing within the HSA is something worth thinking about. Friends don’t let friends keep their HSA in cash (when suitable).
Tying it all together:
All this to say, HSA’s are pretty great. Not only can they help people save taxes, they also make a great party trick if you want to make your tax planner friend jump up and down with excitement on command. Like all things IRS, there is an exception to every rule – and an exception to every exception. Be certain to speak with a tax professional to understand how it applies in your unique circumstance.
At Covenant, we believe in being good stewards under all God has entrusted to us. Whether it is being prepared for medical emergencies or using the money from our tax savings to serve those around us, we can take what God has given us and use for His glory. To some, HSAs may seem boring, and not even worthy to start a party for. For us, the HSA closes a wide open gap for eligible individuals who can now plan strategically for rising medical costs.