Young Professionals Could Avoid Six Figures in Lifetime Taxes With an HSA
Running the numbers shows how health savings accounts could save one couple $160,000 in taxes. With open enrollment coming up, millions of workers should consider this tool’s benefits.
![A man has stacks of $100 bills sticking out of both pants pockets.](https://cdn.mos.cms.futurecdn.net/VxRWYMKYzcZdrsEPB4Ljch-415-80.jpg)
Too many young professionals are leaving Uncle Sam an enormous tax gratuity. How are they doing this? By not taking full advantage of the triple tax benefits of a health savings account. I've yet to meet anyone who wants to pay more taxes. Many do not mind paying their fair share, but they do not want to leave a tip.
An early to mid-career professional with a high-deductible health plan (HDHP) could be missing out on six figures of lifetime tax savings. With open enrollment for health insurance around the corner, it’s time to understand and utilize the benefits of your HSA.
What Qualifies as a High-Deductible Plan?
For 2023 a high-deductible health plan is defined by the IRS as one with a deductible not less than $1,500 for self-only coverage or $3,000 for family coverage, and for which the annual out-of-pocket expenses do not exceed $7,500 for self-only coverage or $15,000 for family coverage. Healthy young professionals are prime candidates for an HDHP. That is because many of them need minimal medical care; they visit the doctor annually and have no or few drug prescriptions.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Because their medical expenses are low, money contributed to a health savings account can be used to generate significant tax savings while also building a large health care nest egg.
What Are the Triple Tax Benefits of HSAs?
Contributing to a health savings account provides a triple tax benefit:
- First, anyone who contributes to an HSA receives a tax deduction. In 2023, individuals can set aside $3,850, and families can contribute up to $7,750. Any employer contributions are included in these limits, though. So, if your employer contributes $1,000, as a family, you can contribute $6,750.
- Next, if you invest your contributions — instead of sitting in cash — all the growth is tax-deferred.
- And lastly, when you pay for qualified medical expenses, distributions are tax-free.
One Couple’s $160,000 in Tax Savings
Here is an example of how a young professional couple can take advantage of an HSA:
Leia and Han will be 35 years old in 2023. They are married, both working, and have an adjusted gross income (AGI) of $225,000. They are covered by an HDHP under a family plan through Leia's employer.
Let us assume that Leia and Han contribute the maximum amount annually to their HSAs from 2023 until retirement 30 years later. We will also assume that their contribution limits increase by 1% a year. The account earns 5% a year, and they utilize the $1,000 catch-up contribution starting at age 55.
By age 65, Leia and Han would have well over $500,000 saved in their HSA. Between their yearly tax savings (federal 24%, atate 5%, and FICA 7.65%) on contributions and foregone taxes on the growth of the investments, they will have saved over $160,000 on taxes.
Let me say that again: They will have saved $160,000 in taxes by taking full advantage of their health savings account.
In this case, the triple tax benefits of pre-tax contributions, tax-deferred growth and tax-free withdrawals can be powerful. Unfortunately, most do not utilize their HSA to its full potential. According to the Employee Benefit Research Institute, average annual contributions were less than $2,000 per account, over half of account holders withdrew funds, and only 9% of accounts held investments other than cash.
How to Make the Most of HSAs
To maximize the benefit of HSAs, I recommend the following steps:
- Contribute the maximum amount to an HSA every year.
- Pay your medical expenses out of pocket, without tapping into the HSA to let it grow ad to possibly even use it as a retirement fund.
- Invest your HSA contributions into a diversified portfolio of stocks and bonds.
- Allow compounding to work its magic.
As a young professional, time is on your side. Days become months, and months become decades. Do not delay saving into your HSA. Start saving and growing your wealth while also prioritizing your health.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Matthew Broom is a wealth planner for CI Brightworth, an Atlanta-based wealth management firm. He serves high net worth clients in the areas of retirement planning, investment management and comprehensive wealth advice. A former firefighter and paramedic, Matthew uses his real-world problem-solving expertise to develop customized financial strategies for the firm’s clients.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published