• Home
  • Learn
  • Realize the potential of HSA tax benefits

Realize the potential of HSA tax benefits

Thanks to three separate tax benefits, your Health Savings Account (HSA) can help you be prepared to pay for short- and long-term health care expenses.

What is the triple tax advantage1

Graphic shows triple tax advantages: 1. Tax-free contributions. You can contribute pre-tax dollars via payroll deductions and any contributions you make directly to your account could be tax deductible. 2. Tax-free growth. Any interest or earnings from your account grow tax-free. 3. Tax-free withdrawals. You can pay for qualified health care expenses on a tax-free basis.

Tax-free contributions

Keep more of your paycheck with pre-tax contributions. One of the benefits of an HSA is that no taxes are withheld from HSA contributions made through payroll deductions — so every dollar you contribute from your paycheck goes directly into your account. That means you could have more money to use on qualified health expenses than if you were to use funds from your checking or savings accounts.

Here's an example of how tax-free contributions could give you more buying power when paying for qualified healthcare expenses when you contribute to an HSA.

Graphic provides hypothetical example comparing the buying power when paying for qualified health care expenses with an HSA and paying for health care expenses without an HSA. When using $4,000 of income to pay for annual family health care expenses, combined state and federal income taxes on that amount could be 27% or $1,080, leaving $2,920 to cover health care expenses. With the tax advantages of an HSA, all $4,000 could potentially be used for family qualified health care expenses.

The hypothetical illustration assumes payroll deduction HSA contributions, a 22% federal and 5% state tax bracket throughout participation, and does not consider any APR or effective rate of return. Changes in tax rates or tax treatment may impact the comparative results. Please consider your time horizon and income tax brackets, both current and anticipated, when making any decision, as these may further impact the results of the comparison. Hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle or account. If you make pre-tax contributions to an HSA, taxes are due upon withdrawal if assets are not used for qualified medical expenses. For amounts invested in mutual funds: Investment return and principal value will fluctuate and when redeemed may be worth more or less than their original cost.

Tax-free growth

Any interest or earnings on your account are tax free, which could add up to more dollars to use toward qualified health expenses. This is just one reason why utilizing the investing feature of your HSA account could be an important component of your long-term financial plan.

Tax-free withdrawals

When you contribute to a tax-advantaged account like a 401(k) or an IRA, you can expect to pay taxes on the money once you begin to make withdrawals. But that's not the case with your HSA. You can make tax-free withdrawals from your account to pay for qualified health expenses.

Impact of paying for qualified health care expenses from your HSA vs. using after-tax dollars

Bar chart shows the impact of paying for qualified health care expenses from your HSA vs. using after-tax dollars. In this example, out-of-pocket annual health care expenses are $4,000. If you were to pay out of your monthly budget, you would have to use $5,479 to cover the expenses plus taxes. Because withdrawals from an HSA for qualified health care expenses are tax-fee, you only need to take out $4,000.

Example is for illustrative purposes only. From monthly budget: $5,479 ($1,479 for taxes* and $4,000 for health care expenses). *Assumes 27% federal and state income tax rate ($5,479 x 73% = $4,000.

How it all adds up

Your HSA is yours for life — there is no use-it-or-lose-it rule, and the balance rolls over from year to year. With a careful balance of saving and spending, even with a modest rate of return on any investments, you have the opportunity to grow your account over time.

See how much your savings could add up over the next 20 years with our HSA balance and tax savings calculator.

1About Triple Tax Advantages: You can receive federal tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to federal income tax and may be subject to an additional 20% tax. Any interest or earnings on the assets in the account are federal tax free. You may be able to claim a federal tax deduction for contributions you, or someone other than your employer, make to your HSA. State tax consequences for HSAs may vary. Bank of America recommends you contact qualified tax or legal counsel before establishing an HSA.