HSA – Triple Tax Advantage Strategy
Tax-advantaged plans such as 401(k)s and college savings plans are everywhere these days, but less well-known are Health Savings Accounts (HSAs) despite the many advantages they offer. Employers and employees alike should be familiar with the benefits these plans offer. HSAs are different from healthcare flexible spending accounts which are relatively restrictive. In contrast, HSAs can be used to help pay for current healthcare expenses and to save to pay for those expenses in the future, including after retirement. HSAs offer what is often described as a triple-tax advantage. The three advantages are:
Contribution made to a HSA are tax-free meaning you pay into it with pre-tax dollars thereby reducing your taxable income.
Earned income on your HSA investment is tax free, meaning you can have substantial funds for future medical costs if you start investing now.
HSA funds can also be spent tax free so long as they are used for qualifying medical expenses. You can make tax-free withdrawals to pay for eligible health expenses. This is an enormous advantage when combined with the tax-free contributions and tax-free growth aspects of this financial instrument.
HSAs provide a powerful financial tool to deal with current and future medical expenses, which can be a major factor when dealing with retirement. The range of allowed medical expenses is broad, and includes dental and mental health expenses. Given the uncertainly that reigns in the medical insurance market and medical costs in general, having a HSA fund provides a strong measure of financial security as it allows you to maximize the benefit of your pre-tax contributions for future medical costs. Employees should seriously consider using them if they are available as part of a benefits package.
For employers the HSA has advantages in terms of recruitment of desirable employees. Benefits play a major role in making a position attractive, so by offering something other employers do not, prospective employers can distinguish themselves in the jobs market. While many employers offer quality health insurance, also offering a HSA and spelling out the advantages it brings can make you stand out. It also allows your employees to position themselves better to handle an adverse situation, which is also a benefit to the company as that is a valued employee you have invested in.
Health Savings Accounts should be considered as part of any benefits package, just as better known financial instruments such as 401(k)s and flexible spending accounts already are.