Health Savings Accounts (HSAs) are becoming increasingly popular among higher-income households, thanks to the numerous tax benefits and other perks they offer. By enrolling in a high-deductible health plan (HDHP) and making tax-free contributions, individuals can fund their HSAs and potentially enjoy matching contributions from their employers. With contributions and earnings growing tax-free, and tax-free withdrawals for qualified healthcare expenses, HSAs offer a unique opportunity to save on taxes both now and in the future.
When you turn 65, you can use the funds in your HSA for any purpose (without incurring penalties). So now you have a resource that can help you cover medical expenses, or simply be used for retirement income once you reach 65. However, keep in mind that using your HSA for non-medical expenses will be taxed as ordinary income, just like a traditional IRA.
It's important to note that HSA contributions are exempt from federal income tax, but may not be exempt from state taxes in certain states. Here in California for example, contributions are currently not exempt. Additionally, you'll have to pay state taxes on realized profits as they accrue within your account. But then in other states, like Colorado, your contributions are considered pre-tax and are therefore 100% deductible. Now even if you're in California, setting up an HSA is still a consideration and should be closely evaluated, as it provides additional resources for your future, and continues to receive preferential tax-treatment from a federal taxation standpoint.
If you're considering opening an HSA, it's crucial to weigh the benefits against the costs and limitations of HDHPs and the need for adequate savings. To determine if you're eligible for a qualified HDHP and to find an HSA provider, speak with your employer or an insurance professional. Additionally, the IRS offers helpful resources to determine which expenses qualify for HSA funds.
Overall, HSAs can be a valuable tool for those who can afford to contribute to them. They offer potential tax savings and the ability to accumulate funds for future medical expenses or even retirement income.
We're an available resource to help you fully understand the benefits and drawbacks so you can determine if an HSA is the right choice for you.
So if discussing further would be productive, you can schedule a quick HSA consult HERE.