Capturing the triple tax benefit of Health Savings Accounts

Steve Merrell |

Over the years Congress has granted tax preferences to many different types of long-term savings accounts. Most of these accounts have two tax benefits. For example, traditional IRAs and 401k plans provide an immediate tax deduction when a contribution is made, plus the benefit of tax-free growth as long as the assets remain in the account. Taxes are paid only as assets are withdrawn from the account.

Health Savings Accounts (HSAs) are unique in providing a triple tax benefit: contributions are tax-deductible, assets grow tax-free and withdrawals are also tax-free as long as they are used to pay for qualified medical expenses. A lot of people use their HSAs to pay for current medical expenses. However, if you want to enjoy the full benefit of your HSA, you need to leave the money in for the long term.

To make contributions to an HSA, you need to meet a few eligibility requirements.


1)    You must not be on Medicare.

2)    You must be covered by a high-deductible health plan. In 2019, the deductible must be at least $1,350 with an out-of-pocket maximum of $6,750 for individuals. For families, the          deductible must be at least $2,700 with an out-of-pocket maximum of $13,500.

3)    You must not be covered by any other medical plan.

4)    You must not be claimed as a dependent on someone else’s 2018 tax return.


Eligible individuals who are covered by a self-only high-deductible health plan can contribute up to $3,500 for the 2019 tax year. The family contribution limit is $7,000. In addition, account holders who reach the age of 55 can make a $1,000 “catch-up” contribution whether they are contributing as an individual or a family. There is no income limit for HSA contributions.

The triple tax benefit makes HSAs a powerful long-term savings vehicle. Some careful planning can help you take full advantage of the power of HSAs in your financial life. A simple example will help illustrate what I mean.

For ease of discussion, let’s assume you are a single taxpayer earning a salary of $100,000 per year. After careful planning, you decide to put 10% of your pretax salary, or $10,000, into long-term savings. Suppose further that your company offers a 401(k) plan to its employees with a dollar-for-dollar match on anything you contribute up to 4% of your salary.

If you put all $10,000 into the 401(k) plan, you will get a company match of $4,000 (4% of your salary) leaving you with an invested balance of $14,000 which will grow tax-free until you begin taking distributions. In addition, you will be able to deduct $10,000 from your taxable income in the year you make the contribution. When you retire and begin taking withdrawals you will pay tax on all distributions as if they were ordinary income.

Now, instead of putting all $10,000 into your 401(k) plan, let’s assume you invest $3,500 (your maximum allowed contribution as an individual) in an HSA and the remaining $6,500 in your company’s 401(k) plan. You will still get the dollar-for-dollar company match up to $4,000. And you will still get a $10,000 deduction from your taxable income ($3,500 for your HSA and $6,500 for your 401(k) contribution). Your overall invested balance will still be $14,000 ($3,500 in your HSA and $10,500 in your 401(k) plan) and it will still grow tax-deferred. However, upon retirement, only distributions from your 401(k) will be taxed. Any distributions you take from your HSA will be tax-free as long as it is used to pay for qualified medical expenses incurred after establishing the HSA. Just keep your receipts. If your HSA distributions are ever questioned by the IRS, you will need to show they were used to pay for qualified medical expenses.

You can learn more about HSAs in IRS Publication 969, “Health Savings Accounts and Other Tax-Favored Health Plans.” 



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to