For many Americans, health care costs are an issue that is becoming more important every day. Health savings accounts, which are commonly called HSAs, are becoming more popular for helping people set money aside for health care expenses. There are also tax advantages with these accounts. According to recent research, HSAs provide account owners with three tax benefits. First, earnings placed in the account will build without tax penalties. Second, contributions reduce a person’s taxable income. Third, the account’s distributions for qualified expenses are not taxed. This type of tax treatment differs from IRAs, 401(k) plans and regular retirement savings plans.
With some other retirement savings plans, contributions may still reduce the person’s taxable income. However, employee contributions and original pre-tax distributions are still taxed. With Roth 401(k) or IRA plans, there are no tax advantages for contributions. The distributions and account growth that follows are not taxed if holding period requirements are met. Experts say that these findings are a good example of why many Americans should consider using a health savings account as a savings option for health care during retirement. Overall, the HSA provides more tax benefits than the majority of other types of plans.
However, researchers also explained that there are several other factors Americans should consider. One example is the possible loss of employer matching contributions in a 401(k) plan. By giving up this benefit, the choice would result in giving up free money. Spend some time calculating the matched contributions versus the tax benefits of using the HSA. If the contributions are more beneficial, it would be better to keep the 401(k) in such a situation. Another example is if a person must pay medical expenses incurred before retirement on a post-tax basis. If they use money not contributed to the HSA, this could be a problem. HSA balances may not be enough to pay for all types of medical expenses.
Savings levels for health savings accounts depend on a person’s rate of return, tax bracket and level of contributions. These findings are meant to highlight the tax benefits of HSAs, which most people are not aware of. However, experts recommend that people analyze their own unique financial situation and needs. Also, not all people have the same health status. Consider all of these factors, make a list of individual points to cover and discuss any concerns with your myCafeteriaPlan Account Manager. Or, if you’re not currently offering our HSA services, give us a call at 800.865.4485.