Young professionals could avoid six figures of taxes for life with an HSA

Too many young professionals leave Uncle Sam a huge tax bonus. How do they do this? By not taking full advantage of the triple tax advantage of a health savings account. I have yet to meet anyone who wants to pay more taxes. Many are willing to pay their fair share, but they don’t want to tip.

An early or mid-career professional with a high-deductible health plan (HDHP) could miss six figures in lifetime tax savings. With health insurance enrollment open around the corner, it’s time to understand and use the benefits of your HSA.

What is a high deductible plan?

For 2023, a high-deductible health plan is defined by the IRS as a plan with a deductible of at least $1,500 for personal coverage or $3,000 for family coverage, and for which annual out-of-pocket expenses do not exceed not $7,500 for self-only coverage or $15,000 for family coverage. Healthy young professionals are prime candidates for an HDHP. This is because many of them need minimal medical care; they consult the doctor every year and have few or no prescriptions for medication.

Because their medical expenses are low, the money contributed to a health savings account can be used to generate significant tax savings while building up a large health care nest egg.

What are the triple tax advantages of HSAs?

Contributing to a health savings account offers a triple tax advantage:

  • 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. However, all employer contributions are included in these limits. So if your employer contributes $1,000, as a family you can contribute $6,750.
  • Then, if you invest your contributions – instead of sitting in cash – all the growth is tax-sheltered.
  • And finally, when you pay eligible medical expenses, the distributions are tax-free.

Couple’s $160,000 tax savings

Here is an example of how a young professional couple can benefit from an HSA:

Leia and Han will turn 35 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.

Assume that Leia and Han contribute the maximum amount annually to their HSAs from 2023 until their retirement 30 years later. We will also assume that their contribution limits increase by 1% per year. The account earns 5% per year and they use the $1,000 catch-up contribution from age 55.

At 65, Leia and Han would have saved well over $500,000 in their HSA. Between their annual tax savings (Federal 24%, State 5%, and FICA 7.65%) on dues and lost taxes on investment growth, they will have saved over $160,000 in taxes.

Let me repeat it: They will have saved $160,000 in taxes taking full advantage of their health savings account.

In this case, the triple tax advantage of pre-tax contributions, tax-deferred growth and tax-free withdrawals can be powerful. Unfortunately, most don’t use their HSA to its full potential. According to the Institute for Employee Benefits Research, average annual contributions were less than $2,000 per account, more than half of account holders withdrew funds, and only 9% of accounts held investments other than species.

How to get the most out of HSAs

To maximize the benefits of HSAs, I recommend the following steps:

  • Contribute the maximum amount to an HSA each year.
  • Pay your medical bills out of pocket, without dipping into the HSA to let it grow and maybe even use it as a retirement fund.
  • Invest your HSA contributions in a diversified portfolio of stocks and bonds.
  • Let the compounding work its magic.

As a young professional, time is on your side. Days become months and months become decades. Do not delay in registering in your HSA. Start saving and growing your wealth while putting your health first.

Wealth Planner, CI Brightworth

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 personalized financial strategies for the firm’s clients.

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