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The Triple Tax Benefit Investment

| January 12, 2022
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It’s not often that the IRS provides a tax-free option for your money—so when it happens, it’s a good advantage to take.
A Health Savings Account (HSA) is the one program that offers you three different tax benefits. Most people think of their HSA simply as a savings tool to pay medical bills—and as we age, our health deteriorates, so we'll have bills to pay at some point. While an HSA is designed to pay for medical expenses, if you’re able to save some or all of that money, there’s a bigger benefit to be had.
In fact, there are three benefits! First, the money you put into the account goes in as pre-tax dollars direct from your employer. And let’s face it, oftentimes if you don’t see the money, you rarely miss it! Second, consider the funds in your HSA like a brokerage account that gets invested, grows and, ironically, grows tax-free. Third, when used for qualified medical expenses, the distributions you take out are also provided tax-free. Voila! The triple tax benefit! (Once you reach age 65, the money can be used for non-medical reasons without taxes or penalties)
In preparation for long-term investments and returns, it’s recommended that you put money into the HSA today and let it grow. This means using alternative income streams to pay for current or short-term medical costs whenever possible. While it may be tempting to use your HSA money, healthcare costs are rising, so anything you can do now to prepare for those costs later can make a significant impact.
As for what you’re spending in the short term: take your reimbursements from the HSA account after it’s had time to grow. You can contribute money into the account, let it grow for decades and then take a lump-sum distribution in the future that would put money in your pocket tax-free. Make sure to keep the receipts for what you paid out of pocket for medical expenses.
Another benefit that has your HSA working for you is a Qualified HSA Funding Distribution made possible by the Health Opportunity Patient Empowerment Act in 2006. It provides an option to roll over the maximum of your annual contribution limit from a traditional or Roth IRA into your HSA account. However, this option is only available once in your lifetime, so use it wisely.
For example: Let's say that you roll over your maximum when you turn 55, and your HSA returns 6% over ten years (until age 65). You’d then have the total amount of that growth to spend on medical expenses, tax-free. But if you left the money in your IRA and got the same return, you'd have to pay taxes on the money you withdraw.
(It’s important to remember that the 6% return number is hypothetical, but the tax requirement is definite.)
As financial professionals, we believe there are many opportunities and strategies to help you attain your long-term goals and we’re here to help. Investing is complicated, so why not enlist professional guidance? Contact our office today.

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This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results.  Death benefit payouts are based upon the claims paying ability of the issuing insurance company. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.

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[1] https://www.nerdwallet.com/article/investing/how-to-invest-hsa
[2] https://www.investopedia.com/transfer-ira-money-to-an-hsa-4770819

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