Liz Weston: How to Harness Your HSA’s Superpowers

If a high-deductible policy is right for you, you’ll need even more money to take full advantage of an HSA – enough to pay the deductible and other health care expenses out of pocket, without touching the account. That’s a pretty big order, but you can still benefit from an HSA even if you have to spend some of the money along the way.

Here are the top four benefits of an HSA.


HSAs offer a rare triple tax break: your contributions are deductible, the money grows tax-deferred, and withdrawals are not taxed if you have qualifying medical expenses.

In contrast, withdrawals from other tax-advantaged accounts, such as 401 (k) s, are generally taxed as income. If the withdrawals are tax-free – as they can be from Roth IRAs – you didn’t get tax relief when you invested the money.


Any unspent balance in your HSA can be carried over from year to year. This contrasts with flexible spending accounts, another tax-efficient way to pay for medical bills. FSAs require users to spend the money within a certain time frame, otherwise those contributions are lost.

FSAs allow you to contribute $ 2,750 in 2021. Individuals can contribute up to $ 3,600 to an HSA this year, while families can contribute up to $ 7,200, plus a catch-up contribution of $ 1,000. for people aged 55 and over.

HSA contributions can be invested, which means your money can really grow. Even if you have to spend some of the money along the way, the tax-free growth can add up.


As mentioned, withdrawals are tax exempt if used for qualifying medical expenses, including health insurance deductibles and co-payments. The IRS maintains a list of eligible expenses ranging from acupuncture to x-rays. You cannot double-dip: Only eligible expenses that have not been reimbursed by another source, such as insurance or an account. flexible spending, can justify a tax-free withdrawal.

The bottom line, however, is that the IRS doesn’t require you to incur the expenses in the same year that you make the withdrawal.

As long as the expense occurred after you opened and funded the HSA, your withdrawal may be tax-exempt even if it’s years or decades later, says financial planner Kelley Long, CPA, finance specialist personal and consumer financial education advocate for the American Institute. of CPAs. You just need to keep receipts of qualifying expenses in case you are audited by the IRS.

“I call it the shoebox strategy,” says Long. “You store your receipts because there is no statute of limitations when you reimburse yourself for eligible expenses. “

You’ll want to protect yourself from ink fading so you can read receipts years later. Long therefore recommends making digital copies. She takes a photo of her eligible receipts and stores them in folders labeled by year.


As a general rule, you cannot declare your dependent children for tax purposes after the age of 19 or 24 if they are students. But many children remain on their parents’ health insurance policies until the age of 26, which gives parents a unique planning opportunity, says Mark Luscombe, senior analyst at Wolters Kluwer Tax & Accounting.

A child who is not a dependent for tax purposes, but still has a parent’s high deductible health insurance, can set up their own individual HSA. Parents can help by giving the child some or all of the money to fund the account.

The child cannot create their own HSA if they are still declared as a dependent on the parents’ income tax return. And once the child is no longer dependent, the child’s expenses cannot be used for tax-free withdrawals from the parent’s HSA. But this approach gives the kid a tax deduction for the contribution and potentially decades of tax-advantaged growth, making it a great strategy for those who can swing it.


This column was provided to The Associated Press by the personal finance site NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Liz Weston is a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score“. Email: [email protected] Twitter: @lizweston.


NerdWallet: What is an HSA?

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