Health Savings Accounts May Provide Triple Tax Savings

by: Smith and Howard Wealth Management

A health savings account, commonly referred to as an HSA, is a tax-advantaged medical savings account. Tax deductible contributions are invested in underlying holdings that grow tax-free. Additionally, withdrawals from the account are non-taxable if used for qualifying medical expenses*. The characteristics of an HSA make it the only financial account that offers these triple tax savings.

*If withdrawals from the account are not used for qualified medical purposes, then there will be a 20% penalty along with income tax owed on the withdrawal.


First and foremost, who can contribute to an HSA? Individuals or families who are enrolled in a high-deductible health plan (HDHP) are eligible to open and contribute to an HSA. If you are enrolled in Medicare, you cannot contribute to an HSA; you can, however, make withdrawals from an existing HSA if it was opened before you enrolled in Medicare.

What is Considered a High Deductible Health Plan?

Type of High Deductible Health PlanIndividual (single)Family
Annual Deductible$1,400$2,800
Out of Pocket Maximums*


*Includes deductibles, copayments, and coinsurance


Contribution Limits to Health Savings Accounts (HSA)

Type of HSAIndividual (single)Family
Annual Contribution Limit$3,000$7,200
Catch up Contributions*


*For individuals who are 55 and over


Tax Incentives

An HSA can offer triple tax savings if implemented correctly.

  1. Funding the account gives you a tax deduction that directly lowers your taxable income (receiving a dollar-for-dollar deduction from your taxable income for the amount you contribute to the HSA, up to the maximum contribution limits). This is referred to as an above-the-line deduction. There are no income limitations for an individual or family when it comes to receiving this tax deduction, unlike contributions to other “tax favored” accounts, like 401(k)s, Individual Retirement Accounts (IRAs) and ROTH IRAs, where high income earners are often phased out.
  2. Invested holdings in the HSA grow tax-free. This means that any gains you make off your investments will not be taxed when you liquidate those positions. This is different from a brokerage account, where positions liquidated within the account are either taxed as ordinary income or treated as long-term capital gains.
  3. When you take distributions from the HSA for qualified medical expenses, they are non-taxable to you. This is different from traditional tax-deferred accounts like the previously mentioned 401(k) and IRA. When you take distributions from those accounts, they are considered ordinary income to you and taxes will be owed.

To sum it up: tax-deductible contributions (no matter how high your income) made to the HSA grow tax-free and eventually come out of the account non-taxable to you when used for qualified medical expenses.

You Own Your HSA

When you open an HSA, you own the account. Because you own the account, it stays with you regardless of your employment status. For example, if you initially open your HSA while employed with a certain company and you leave that company, your HSA stays with you, not your former employer. It is also not tied to your health insurance provider. However, you must be enrolled in a high deductible health plan (HDHP) to contribute to the HSA. So, if you leave your employer where you had an HDHP with an HSA but do not enroll in your new employer’s HDHP, then you will not be able to contribute to your existing HSA. You can still take withdrawals from your existing HSA as long as they are used for qualified medical purposes.

Other Facts About the HSA

Funds inside an HSA are never lost if not used by year-end. If you have a balance at the end of a year, that balance will carry over into subsequent years, whether or not you made any withdrawals. This is a distinct difference between the HSA and the Flexible Savings Account, where funds not used by year-end are lost, or only a certain amount can be rolled over into the new year.

Typically, if HSA funds are used for non-qualified medical expenses, there will be a 20% penalty and income tax will be owed. However, if you have reached the age of 65, then non-qualified medical withdrawals will not incur a 20% penalty. Only income tax will be owed on those withdrawals. If you do have qualified medical expenses and you are over the age of 65, those withdrawals will be non-taxable. Because of this post-65 rule, an HSA account can be a great savings vehicle for high-income earners throughout their pre-65 years, giving them a tax deduction that they would not be able to obtain through more traditional routes like an IRA (where income limits affect eligibility to receive a tax deduction).

Is an HSA Right for You?

As discussed at the beginning of this article, you must be enrolled in an HDHP to qualify to open and contribute to an HSA. This means that before your insurance company pays for anything, you must reach your deductible of $1,400/$2,800 for individuals/families, respectively. Also, your out of pocket maximum expenses can reach $7,000/$14,000 for individuals/families, respectively. So, the HSA is a good fit for individuals or families who have the means to cover these expenses if they were to occur and reach these higher dollar amounts. They may also be a good fit for individuals and families who do not visit the doctor frequently as they can save on health insurance premiums with an HDHP that typically has lower premiums. It is important to note that anyone considering an HDHP needs to evaluate their own circumstances and consider if an HSA is right for them or their family.

Frequently Asked Questions

  1. How can contributions be made to an HSA?
    • Contributions can be made on your own or through your employer.
  2. What type of assets can be contributed to an HSA?
    • Only cash can be contributed to an HSA.
  3. What happens if I contribute too much to an HSA?
    • Excess contributions will count as income, with a 6% excise tax.
  4. Is there a contribution deadline for an HSA?
    • Yes, April 15th of that filing year, e.g. the HSA contribution deadline for the 2020 tax year is April 15th of 2021.
  5. Can I have and contribute to more than one HSA?
    • Yes, but the annual contribution limits still apply to all contributions made to each HSA that you own.
  6. What are qualified medical expenses for an HSA?

An HSA can be a vital savings account for those who are truly a good fit. HSAs offer tax deductions, tax-free growth and tax-free withdrawals for qualified expenses. They are also a great way to save for expensive, unexpected medical costs as the funds in the account are able to grow and compound. If you have any questions regarding an HSA, please contact me, Michael Mueller, CFP® or Jeff Brandon, CFP®.