HSA's - The Triple Tax Benefit

Christian Binger |


Did you know that although the maximum contribution is less than a 401(k), Health Savings Accounts (HSA) may offer more tax advantages than a 401(k)? HSA’s are one of the most tax advantaged accounts the IRS recognizes due to their triple tax benefits. HSA’s allow you to accumulate a medical/healthcare savings fund while creating tax savings on contributions AND withdrawals. Here’s how those tax benefits work:

| Tax Benefit 1: Tax Deductible Contributions

HSA contributions are deducted from gross income. Deducting from gross income has a direct effect on lowering Adjusted Gross Income (AGI) and Taxable Income. The maximum amount available to contribute in a tax year depends on if it’s a Single HSA or Family HSA. In 2022, the Single HSA max contribution is $3,650 while the Family HSA max contribution is $7,300. A family is counted by health coverage, not tax marital status. To qualify for the family max, more than one member of the family must be covered by a qualifying High Deductible Health Plan (HDHP). Another wrinkle is that both employer and employee contributions count towards the max contribution. If you own an HSA and your employer actively contributes, be sure that the combined contributions don’t exceed the max contribution. However, only your employee contribution is deducted from gross income.

| Tax Benefit 2: Tax Free Growth

Tax free growth inside the HSA means taxes are not assessed while funds accumulate in the HSA.  Most HSA plans have investment options once the balance exceeds $1,000. The investment options are pre-selected and are often mutual funds. Any investment growth these mutual funds provide from interest, capital gains, dividends, and unrealized growth are not taxed because they occur inside the HSA account. Coordinate with your Embark Wealth Advisor to review investment choices and ensure your investment allocation matches your objective with the HSA.

| Tax Benefit 3: Tax Free Distributions for Qualified Healthcare Expenses

This third tax benefit is what separates HSA’s from traditional 401(k)’s and IRA’s. Traditional 401(k)’s and IRA’s are taxed upon withdrawal. However, HSA withdrawals will not be taxed if it is covering a qualified medical expense. Qualified medical expenses include a host of items including doctor’s visits, dental exams, co-pays, vision care, etc. Spending funds out of an HSA for non-qualified medical expenses does have its penalty. The IRS assesses income taxes and 20% penalty on the non-qualified withdrawal. Once you reach age 65, HSA funds can be used for any reason and the 20% penalty will not apply. Income taxes are still assessed in this situation. Qualified medical expenses remain completely tax-free after age 65. If you are not sure how an HSA withdrawal will be treated, check with your Embark Wealth Advisor.


In addition to the above tax benefits, HSA’s accumulate. Unlike the Flexible Spending Account (FSA) that you must spend in a calendar year (“use it or lose it”), the HSA balance rolls over year-to-year, allowing growth to happen as you contribute. Investment options are also typically provided once an HSA balance eclipses $1,000.

Before enrolling and contributing to an HSA, confirm with your Embark Wealth Advisor you meet the IRS requirements. Generally, the requirements from the IRS are: (1) to be covered under a High Deductible Health Plan (HDHP); (2) not be covered under another health plan or Medicare; and (3) not be a dependent on another individual’s tax return. Now is a great time to check-in on your year-to-date HSA contributions and develop a plan for the remainder of the year

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.