The Triple Tax Advantage of HSAs

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Remember the old saying, “It’s not what you earn, it’s what you keep.”

As high-deductible health insurance becomes more common, health savings accounts (HSAs) may offer a hidden retirement savings option.


If you’ve never been eligible for an HSA and suddenly find you’ve changed jobs – or your employee benefits have changed – you may find you have a new health savings option. HSAs are available to people who have a health insurance plan with a high deductible (read on).


You probably already understand how individual retirement accounts (IRAs) and workplace tax-deferred savings accounts such as a 401(k) let you sock away money for retirement. This can be another tool.


You can think of an HSA as sort of like an IRA for health care. Money goes in pre-tax. It grows tax free. And if it’s used for qualified medical expenses, it comes out tax free. That’s a triple tax advantage.


A recent Kaiser Family Foundation study found high-deductible plans are becoming more common, so even if you weren’t eligible before, you may be soon. In 2016, 29% of workers were in such plans, up from 20% in 2014.


It’s worth mentioning you can withdraw money from an HSA account at any age to pay qualified medical costs without having to pay taxes on that withdrawal.


Or you could go ahead and pay those medical deductibles and copays out of pocket during your working life instead of tapping your HSA. After all, you can make up that income. Instead, you can leave your HSA untouched and let it grow, tax deferred, throughout your career. Then in retirement, after age 65, you can take it out for anything and only pay ordinary income tax, just as you would with an IRA or workplace retirement plan.


The catches

Of course, the generosity of the government has limits. There are rules to stashing money in an HSA.


You must qualify. The most important requirements are:

  • You must be in a high-deductible health insurance plan. In 2017, that’s a plan with a deductible of $1,300 or more for an individual, $2,600 for a family plan. (Note that you cannot be enrolled in another plan that is not an HDHP or provides coverage for a benefit that is covered by the HDHP.)
  • These limitations are adjusted for a cost of living increase every year, so in 2018, these amounts increase to $1,350 or more for an individual, $2,700 for a family plan. In future years, there may be additional cost of living increases.
  • Additionally, a high-deductible plan cannot require that you have more out-of-pocket expenses under the plan than $6,650 for individuals and $13,300 for a family.
  • With certain exceptions, you cannot be enrolled in a plan that is not a high-deductible health insurance plan or a plan that covers benefits covered under the high-deductible health plan.
  • Failing to meet the above requirements or any other requirements needed to qualify means that your HSA contributions will be taxable. Plus, any tax you owe will be increased by an additional 10%.


  • Once it’s in, it’s in. If you put money into an HSA, you’ll pay income tax plus a hefty 20% fine if you take it out for anything other than qualified medical expenses (generally, until you’re 65, but there exceptions, including death and disability). That’s double the penalty for early IRA withdrawals.


  • There are limits. You know the government wouldn’t let you keep unlimited amounts of income out of its mitts. The most you can put into an HSA in 2017 is $3,400 per individual, or $6,750 for family coverage (plus a $1,000 catch-up for those 55 and older) These limitations are also subject to a cost of living index, so, in 2018, the limits are $3,450 for individuals or $6,850 for a family plan. Individuals who are 55 and older are also allowed to make an additional annual catch-up contribution of $1,000.  The amount allowed for catch-up contributions does not change from year to year.  The amount you are allowed to contribute may also be limited by other factors, such as contributions made to another HSA.  Amounts that can be contributed to an HSA are also subject to certain monthly limitations. Some employers contribute to employee HSAs. That company contribution counts toward the limit. If you make a mistake and exceed the limit, all is not lost. You can take the excess out before filing taxes and report the excess as income. A tax professional could help.


  • Know the rules. If you contribute more than the allowable amount into an HSA, you will have to pay ordinary income tax on the excess plus a 6% excise tax. This can trip you up if you change jobs or otherwise change insurance plans from an eligible high-deductible plan to a plan with lower deductibles.

And remember, the HSA is yours to keep. It’s not to be confused with the workplace flexible spending account (FSA) that sets aside “use it or lose it” money for health and dependent care you must use in the year you set it aside. The HSA is your money. Even if you change health plans and don’t qualify for contributions, you can leave your HSA money where it is. In fact, if your company offers a qualifying high-deductible plan but no HSA, you can set up an HSA yourself.

Want to know more? Consult a financial professional, and check out the IRS’ surprisingly easy-to-read publication on HSAs.


Share your experiences with an HSA. Any tricks that have helped you figure it all out?


Neither Transamerica nor its agents or representatives may provide tax, investment, or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding his or her particular situation and the concepts presented herein.