Lots of young professionals leave Uncle Sam a massive tax bonus. How do they do this? By not taking full advantage of the triple tax benefits of a health savings account. I have yet to meet anyone who wants to pay more taxes. Many don’t mind paying their fair share, but they don’t want to leave a tip.
Early to mid-career professional with a High Deductible Health Plan (HDHP) You could lose six figures of lifetime tax savings. With open enrollment for health insurance just around the corner, it’s time to understand and take advantage of your HSA’s benefits.
What counts as a high deductible plan?
For 2023, the high-deductible health plan is set by the IRS As one with a deduction of at least $1,500 for self-cover only or $3,000 for family coverage, whose annual personal expenses do not exceed $7,500 for self-cover only or $15,000 for family coverage. Healthy Young Professionals are prime candidates for the HDHP programme. This is because many of them require minimal medical care; They visit the doctor annually and have little or no prescriptions.
Because their medical expenses are low, the money contributed to a health savings account can be used for significant tax savings while building a significant health care egg.
What are the triple tax benefits of HSA?
Contributing to a health savings account provides a triple tax advantage:
- First, anyone Contributes to HSA receive a tax deduction. In 2023, individuals can allocate $3,850, and families can contribute up to $7,750. However, any employer contributions are included within these limits. So, if your employer contributes $1,000, as a family, you can contribute $6,750.
- Then, if you invest your contributions – rather than staying in cash – the entire growth will be deferred from taxes.
- Finally, when you pay for eligible medical expenses, the distributions are tax-deductible.
$160,000 per couple in tax savings
Here is an example of how a young professional couple can benefit from an HSA:
Leah and Han will be 35 years old in 2023. They are married, both working, and have an Adjusted Gross Income (AGI) of $225,000 USD. They are covered by HDHP under a family plan through their employer.
Let’s say Leah and Han contribute the maximum amount annually to their HSA from 2023 until retirement after 30 years. We’ll also assume that their contribution limits increase by 1% per year. The account earns 5% annually, and they use a $1,000 compensation contribution starting at age 55.
By age 65, Leah and Han could have saved upwards of $500,000 in their Health Insurance Account. Between their annual tax savings (Federal 24%, atate 5%, and FICA 7.65%) on contributions and lost taxes on investment growth, they would have saved more than $160,000 on taxes.
Let me say it again: They would 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 of them do not use HSA to its full potential. According to the Employee Benefit Research Institute, Average annual contributions were less than $2,000 per account, more than half of account holders withdrew money, and only 9% of accounts had non-cash investments.
How to get the most out of HSAs
To maximize the use of HSAs, I recommend the following steps:
- Contribute the maximum amount to Hayel Saeed Anam every year.
- Pay your medical expenses out of your pocket, without the benefit of an HSA to allow it to grow potentially Use it as a retirement fund.
- Invest your HSA contributions in a diversified portfolio of stocks and bonds.
- Allow the compound to work its magic.
As a young professional, time is on your side. Days become months, months become decades. Do not delay saving in Hayel Saeed Anam. Start saving and growing your wealth while also prioritizing your health.
Wealth Chart, C.I. Brightworth
Matthew Broome is a fortune planner for CI Brightworth, a wealth management company based in Atlanta. He serves high net worth clients in the areas of retirement planning, investment management and comprehensive wealth advice. Matthew, a former firefighter and paramedic, uses his experience solving real-world problems to develop customized financial strategies for the company’s clients.