By now, you’re probably familiar with the triple-tax advantage of HSAs—tax-free contributions, growth, and withdrawals for qualified medical expenses. The triple-tax advantage is an unprecedented benefit, and it allows for more specific tax benefits that might be flying under your radar.
Non-Withdrawal Tax Breaks
HSA funds that go untouched get tax breaks even better than the ones for IRAs and 401(k)s. HSA funds left in your account can compound for years. Even if you don’t withdraw from your HSA for medical expenses, you can turn in your receipts for tax-free reimbursement down the road. (See next section.)
Save Now, Cash in Later
You can earn tax-free interest on your HSA contributions by paying for qualified medical expenses out-of-pocket and reimbursing yourself later. There is no expiration date on reimbursement, and unlike with an IRA withdrawal, the payout will be tax-free. Just be sure to keep your receipts, and you can wait a long time—even decades—before reimbursing yourself. What’s the advantage of this? Maybe you’re saving up for something expensive, like a vacation or even retirement. You can pool the receipts for your out-of-pocket medical expenses over a series of time and receive tax-free reimbursement for them all at once when you need the money.
Most employers offer the option to set up payroll deductions on your account, meaning money will automatically go into your HSA tax-free. This is an excellent option for promoting continuous HSA growth; however, if you make direct contributions to your HSA, you may be able to claim a tax deduction for that amount when you file your tax return.
Employer Tax Benefits
HSA tax benefits are a win-win for both employers and employees. Employer HSA contributions are tax-deductible as a business expense, and they are exempt from FICA taxes. An employer who has 100 employees on an HSA plan can save more than $50,000 a year in FICA tax savings.
Tax-Free Investment Growth
HSA funds are the perfect candidate for investment since their growth is not taxed. While making the maximum yearly contributions to your HSA is crucial, simply stashing away your HSA deposits is unlikely to carry you through retirement. HSA funds can be invested tax-free in mutual funds, stocks, or bonds. Learn all about MotivHealth HSA investments and investment options here (link to MHSA Investments Article). If someone contributed $4000 annually to their HSA investments for 20 years, and averaged a 7% return per year, they would have $82,000 more than someone who did not invest their HSA funds.