Understanding HSA Tax Benefits, and If Contributions Are Deductible

Investing

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Published: June 3, 2024 9:30 am

Last Updated: June 6, 2024 12:20 pm

Health savings accounts (HSAs) are known as some of the most tax-advantaged savings vehicles designed to help you sock away money for future medical expenses.

One of its main benefits is tax-deductible contributions. But it’s important to know how HSA tax breaks work in order to avoid consequences such as tax penalties. So let’s take a look, starting with how contributions are treated.

Are HSA contributions tax-deductible?

Piggy bank with stethoscope and calculator on white table, health saving account, tax, hsa concept — HSAs offer key tax benefits.

HSA contributions are tax deductible. When you file your taxes, you can claim the year’s HSA contributions as tax deductions on your tax return.

If you have an HSA through your employer, your contributions are typically deducted directly from your paycheck. As a result, these contributions reduce your taxable income and therefore could lower your tax liability or earn you a bigger refund.

However, it’s also important to know the contribution rules.

Every year, the IRS sets contribution limits for HSAs. Here are the contribution limits for 2024.

$4,150 for individual coverage
$8,300 for family coverage

And if you’re at least 55-years-old, you can make additional “catch-up” contributions of $1,000.

But tax-deductible contributions aren’t the only highlights of HSAs.

HSA benefits

Health Savings Account ( HSA ) coin jar with piggy bank — HSAs have plenty to offer.

HSAs were designed to help people save for future medical expenses. But they also provide a triple tax advantage. Here are some HSA highlights

Contributions are tax-deductible
Contributions grow tax-free from interest and market returns
Withdraws are tax-free if used for qualified medical expenses

But it’s important to note that HSA distributions used for non-qualified medical expenses before the age of 65 would kick in a 20% tax penalty on the withdrawal in addition to ordinary income taxes.

However, HSA eligible expenses cover a long list of medical, dental, and prescription costs. These can include vaccines, braces, and even acupuncture.

To take a look at the current HSA qualified healthcare expenses, take a look at the latest version of IRS Publication 502. But keep in mind the IRS can revise this at its own discretion.

How to use an HSA for retirement

HSAs are also known for their potential to be used as retirement savings vehicles. That’s because after you turn 65, you can withdraw HSA funds to cover anything penalty-free. You’d still owe ordinary income taxes on the distribution.

Nonetheless, an HSA can be an effective addition to your individual retirement account (IRA), Roth IRA, or 401(k).

Plus, many HSA providers such as Schwab and Fidelity allow you to invest your HSA dollars in long-term and growth oriented securities like exchange-traded funds (ETFs) and mutual funds. This could add more to your retirement savings in time.

Why this matters

Head shot portrait smiling Indian female doctor physician in white uniform with stethoscope holding pink piggy bank, looking at camera, medical insurance or charity concept, healthcare and medicine — It’s important to understand the HSA rules in order to avoid penalties.

HSA contributions are tax-deductible. In addition, withdrawals are also tax-free if used on qualified healthcare expenses. But it’s essential to know the rules and how HSAs work in order to make the most out of these savings vehicles and their tax benefits.

If you want to learn more about HSAs, check out our regularly-updated HSA main page for the latest coverage.