By Sabrina Karl
With the end of the year approaching, many Americans face a choice on their 2021 health insurance policy. If you aren’t already in a high-deductible plan, it’s worth considering one of these policies as they offer a triple tax benefit that can significantly stretch your healthcare dollar.
The tax magic from high-deductible plans comes in the form of a health savings account (HSA), with only those enrolled in a high-deductible plan being eligible to make HSA contributions. By putting money aside for healthcare expenses in an HSA, you protect it from taxes in three ways.
First, any money deposited into an HSA (up to the annual limits of $3,600 for an individual or $7,200 for a family) can be deducted from your taxable income, dollar for dollar. In that way, HSAs are treated just like IRA or 401(k) contributions. Sock away $5,000 in your HSA and the income on which you pay taxes goes down by $5,000.
Second, any growth on your HSA funds is also tax free. Whether you earn interest in a bank HSA or investment gains in a brokerage-style HSA, none of these earnings will ever be taxed. Compare that to the tax bill increase that would be triggered if you instead put the funds in a standard bank or investment account.
Lastly, whenever you withdraw HSA funds for an eligible healthcare expense, there is no tax on your withdrawal. This differs from withdrawals taken from an IRA or 401(k), where those distributions, even if taken after reaching the required retirement age, are taxed as regular income. Eligible HSA withdrawals, in contrast, are a completely non-taxable event.
When all of these tax breaks are combined, the amount of you can save on healthcare is significant with an HSA, and is worth considering for 2021 and beyond.