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Health Savings Accounts: Maximize the Tax Advantages

by Terri Velgara

Health Savings Accounts (HSAs) were created to help individuals with high-deductible health care plans manage their medical expenses, and they have three significant tax advantages:

1.    Contributions are tax deductible, even if you do not itemize on your return.

2.    Capital gains and interest are tax-exempt.

3.    Distributions for qualified medical expenses are tax-free.

While Flexible Health Savings Accounts (FSA) offer tax savings for medical expenses, they require the funds to be used during the calendar year. HSAs can continue to hold funds for the long-term, eliminating the prospect of giving up assets in the account at the end of the year or if you switch employers. 

Many individuals use their HSAs to immediately cover their medical expenses over the course of the year. However, HSAs can be integrated into your long-term retirement savings plan by allowing the account to grow. As medical costs continue to rise, most people can expect to face larger health related expenses during retirement. Contributions made to your HSA today can be used to cover medical expenses after you retire, including prescription drugs, dental expenses, and Medicare premiums.  Here are the contribution limits for 2019 and 2020:

Health Savings Account Contribution Limits

20192020
Individual$3,500$3,550
Family$7,000$7,100
55+ "Catch Up"$1,000$1,000


Normally, you have until April 15 to complete a contribution for the previous year, but for the 2019 tax year this date has been extended to July 15, 2020.  Many large employers offer matching contributions to employee HSAs, which is an excellent way to help the account grow quickly. 

By creating a long term plan, you can take advantage of the tax savings and use your HSA as an additional source of funds to cover your medical expenses in retirement. 

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The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only.  Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.