Tax Insights

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Health savings accounts as retirement savings

health savings accounts, retirement savingsThree words: triple tax free. The contributions are tax deductible, the earnings are not taxed and distributions are tax free if they are used for qualified expenses. This is the main advantage and beauty of Health Savings Accounts (HSAs). While Roth and traditional retirement savings accounts will almost always result in taxable income (now, or when distributions are received), if HSA funds are used for qualified medical expenses, the HSA will remain tax free.

HSA advantages

There are additional advantages associated with HSAs. One being that funds in HSAs are portable, meaning the funds (even those from employer contributions) will not leave you if you change employers. This is in stark contrast to 401(k)s where if you leave the employer, you could lose a portion of your retirement that you are not vested in.

Section 199A: Fund your retirement to qualify

Another advantage over other retirement accounts is that HSAs do not have required minimum distributions (RMDs). Unlike traditional retirement accounts that have RMDs once you turn 70½, you can keep the funds in your HSAs, invested and growing, until it is necessary to use them.

A third major advantage of HSAs is that funds do not need to be used directly on medical expenses, and there is no time limit as to when the reimbursements must take place. If you have incurred medical expenses since opening the HSA, you can reimburse yourself whenever necessary, with the reimbursements being tax free.

Distributions and reimbursements

Therefore, depending on your individual facts and circumstances, if you qualify for an HSA, you can pay for your medical expenses out of pocket and allow your funds to continue to grow tax free. Just make sure to keep track of all your medical expenses, and when and if they have already reimbursed yourself for these medical expenses.

Now, you may be saying to yourself, “I’m as healthy as an ox, how will I ever get the money out of my HSA?” The worst-case scenario is that your HSA essentially turns into a traditional IRA after you turn 65. Any distributions you take out will not incur a penalty but will be treated as taxable income. However, if those distributions are for qualified medical expenses, they will continue to be tax free.

If you feel like an HSA may be the right fit for you, or if you already have an HSA but feel as if you are not maximizing its benefits, reach out to your friendly Henry+Horne tax professional to discuss your options.

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