Health Savings Account: A Triple Tax Threat



By Zach Bainter
12/07/2019
Email: zach@gerberkawasaki.com
Twitter: zvbfor3
LinkedIn: zacharybainter

One of the primary objectives for many of my clients revolves around tax planning and minimizing what is owed. Most people take advantage of their 401(k) at work knowing that two key benefits are deductible contributions and tax-deferred growth. Less commonly used, the Health Savings Account (HSA) can provide even more tax benefits!

HSAs are designed to allow individuals to save money in a dedicated account that can be used to pay for qualified medical expenses. Contributions to an HSA are federally tax-deductible (not state tax-deductible in California). However, the limits are lower. In 2020, an individual can contribute up to $3,550 and an individual with family coverage can contribute up to $7,100. There is also a catch-up contribution for those aged 55+ of $1,000.

Withdrawals from an HSA are tax-free if they are used to pay for qualified medical expenses. In addition to medical bills, some dental, vision-care, and over-the-counter medications you have a prescription for can qualify. If you withdraw from your HSA for a non-medical expense, the withdrawal will be subject to taxes and a 20% IRS penalty.

One of my favorite features about the HSA happens at age 65. Once you’ve reached the age of 65, you can make withdrawals from the HSA for non-medical expenses and just pay income taxes -very similar to a pre-tax retirement account. The 20% penalty no longer applies! This rule is a reason why many look at their HSAs as a supplement to their 401(k) and IRA. If you are in a situation where you can’t maximize both your 401(k) and HSA contribution, it might make more sense to contribute the HSA max before your 401(k) max -be sure to always take advantage of any employer match though!

What makes the HSA even better is that you can invest your contributions in mutual funds for tax-deferred growth. This makes them extremely powerful if used strategically. A common mistake is utilizing the HSA but not investing the contributions.

Unfortunately, the HSA can’t be used by everyone. Your health insurance must meet the IRS definition of a high deductible high premium (HDHP) plan. Many employers today offer an HSA option. Be careful to read the plan benefits to ensure that an HSA is suitable for your health situation. There are many strategies involved so be sure to talk to your financial planner about how to maximize the triple tax threat!

Securities offered through LPL Financial, Member FINRA (http://www.finra.org/)/SIPC (https://www.sipc.org/). Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor. Gerber Kawasaki and Gerber Kawasaki Financial Advisors are separate entities from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures the success or protects against loss.
Gerber Kawasaki, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393