CFP’s Favorite Tax Strategy In All of History

Every time I see financial advisors posting on social media about their favorite tax-saving strategies - HSA’s (Health Savings Accounts) are ALWAYS mentioned.

Here’s why - it’s a mini-investment account you can contribute to for medical expenses pre-tax (so it lowers you taxable income), any growth that happens is tax free, and distributions are tax free. Yay for no taxes!!!

But with everything, there is always a catch.

First - you have to have a high-deductible health plan to qualify for an HSA. This means you’re banking on growing this account only if you never have to take money out for health expenses.

Additionally - there are contribution limits that apply - if you’re filing single in 2023 that limit is $3,850 and if you’re married it’s $7,750. If you’re over 55, you’re allowed an additional $1,000 per year as a catch-up contribution.

What happens if you over-contribute? There can be assessed a 6% excise tax on any contributions over the allowable amount, both in the year you contribute and for each additional year you fail to remove the excess contribution (along with any earnings that contribution made).

What if you use your funds for an ineligible expense? If you’re under 65, you’ll pay a 20% penalty along with tax on any money withdrawn. (If you’re over 65, you can actually use the funds on ineligible expenses without the penalty, but still will have to pay income tax on the amount withdrawn).

So HSA’s are just like many other tax vehicles - there are upsides and downsides, and whether they will work well for someone depends on their holistic situation.