The Double Tax Shelter

This time of year, many in the workforce are going through benefit open enrollment periods.  When it comes to tax shelters, it’s wise to consider a Health Savings Account (HSA).  An HSA must be paired with a high-deductible health insurance plan, which for some people does not help them effectively manage their healthcare costs.  But for many affluent families, the tax advantages of an HSA far outweigh any short-term potential increase in out-of-pocket healthcare expenses.

HSA contributions are considered an “above the line” deduction, meaning they are not included in adjusted gross income (AGI) on your tax return.  This is effectively very similar to the front-end tax reduction you might receive in a pre-tax 401(k).  But it gets better.  As long as funds withdrawn from an HSA are used for qualifying healthcare expenses, those funds can be withdrawn from the HSA completely tax-free.  The tax break here is very similar to what you might receive in a Roth 401(k) or Roth IRA.

In fact, the HSA has both the early tax benefits of a pre-tax 401(k) combined with the future tax benefits of a Roth 401(k) or Roth IRA.  It may sound crazy, but the tax savings effect of an HSA is the same as if you had a tax-free Roth 401(k) with a match from the federal government equal to your current tax rate.  The HSA is the only double tax shelter ever created!

In order to maximize this tax-free growth potential, it can be wise to consider investing an HSA in sound investments.  Since you can withdraw funds from an HSA for qualifying healthcare expenses incurred in previous years, you can let the tax-free growth accumulate in the account for a long period of time.

HSAs have other rules to consider, so consult with your financial and/or tax advisor to explore all your options.  Just don’t overlook the HSA, which allows both your upfront tax savings and the potential long-term, tax-free investment growth to potentially help subsidize your healthcare expenses in retirement so you can spend most of your retirement income on other important needs and wants to support your desired standard of living.


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