Most people should NEVER pay for qualified medical expenses without involving their HSA account. The short reason: HSAs are the most tax-efficient investment vehicles available. There are three tax advantages of an HSA: contributions up to the IRS limit are tax-deductible, qualified medical expenses are tax-free, & growth inside your HSA is tax-free. The money used to pay for medical expenses through an HSA is typically never taxed.
Ways to contribute:
If you have an HSA through your employer, your direct contributions are tax-free. Then when you make payments on your qualified medical expenses, no taxes are owed. For example, if you are in a 22% tax bracket, that is an immediate 22% savings vs not using your HSA.
However, if you have a high deductible individual plan, as most small business owners & farmers do, then you can set up your own HSA account. If you do this, you will record your annual contribution amounts when you file your taxes to earn that tax savings.
Ways to spend:
Confirm with your HSA provider, but there are typically three ways to pay for your medical expenses. The first way is with an HSA issued debit card. The second is with HSA issued checks. The final method that most people do not know about or forget about, is personal reimbursement. As long as you opened your HSA before expenses were incurred, your reimbursement is tax-free.
Our family typically uses the personal reimbursement method. The main reason is that we use a credit card with a 2% cashback. Then each month, we can pay our balance off with our HSA (*qualified medical expenses only). These extra savings may not seem like much, but if you contribute the maximum allowed in a family HSA plan for 2022, $7,300. That comes out to $146 cashback each year.
Tax Savings:
The total savings each year by using the HSA for medical expenses is $1,752. This is assuming a 22% federal income tax bracket, bringing the tax savings to $1,606 plus the credit card savings of $146.
Assuming an 8% return, if you reinvest these savings each year, you will have $80,175 in 20 years.
Disclaimer: Refer to your HSA provider or https://www.fidelity.com/go/hsa/why-hsa for updated rules and qualified expenses. You must be covered by a high-deductible health plan on the first day of the month to qualify for an HSA. All recommendations are general in nature; we recommend consulting your financial advisor regarding your situation. Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor.