As tax filing season approaches, I wanted to share a strategy for maximizing your Health Savings Account (HSA) and saving on taxes. While the best long-term approach is to let HSA funds grow tax-free over time and make withdrawals in retirement, I understand that not everyone has that luxury.
According to research from the Employee Benefit Research Institute, only 14% of HSA owners contributed the maximum amount allowed in 2022. If you haven’t hit the maximum contribution yet for 2023 and have unreimbursed medical expenses for the year, here is what you can do to make those expenses (essentially) tax deductible.
Let’s say the 2023 maximum HSA contribution for a family is $7,750, but you’ve only contributed $2,000 so far. Assume you also had $3,000 in unreimbursed medical expenses for your children in 2023. You can make an additional $3,000 contribution by the April 15th tax filing deadline and deduct that amount from your taxes. For someone in the combined 30% federal and state tax bracket, that additional contribution saves you $900 in taxes.
Then, you can withdraw the $3,000 tax-free from your HSA to reimburse yourself for those medical expenses. Your net out-of-pocket is zero ($3,000 contribution + $3,000 withdrawal) but you’ve just saved $900 whether you use the standard deduction or itemize.
You can make the additional HSA contribution through your employer’s plan or by opening a separate HSA. Just be sure your total contributions (yours and any your employer might make) for the year do not exceed the annual maximum.
If you find this tip helpful, check out my book Innovative Techniques for Maximizing Roth and Health Savings Accounts for more strategies. It’s available on Amazon.
1 Employee Benefit Research Institute, EBRI Issue Brief No. 603, March 7, 2024
Decoding the Successful Retirement Journey: Vol.3, No.3
