Sally and Steve switched to a high-deductible health insurance plan (HDHP) last year. To help save money on their family's out-of-pocket health expenses like doctor visits, vision and dental care and prescriptions, the Seavers opened an HSA and made monthly contributions through payroll deduction offered by Sally's employer.
By using her employer's payroll deductionFootnote1, Sally was able to make HSA contributions on a pretax basis—meaning every dollar she contributed from her paycheck was a dollar saved in her HSA.
By the end of the year, Sally contributed $4,000 to her family's HSA. Without an HSA, their $4,000 would have been taxed like regular income, costing the Seavers $1,000:
Benefit of pretax contributions in the first year
Without HSA
With HSA
Income set aside for family health expenses (before taxes)
$4,000
$4,000
Minus 25% federal income tax
$1,000
$0
Money left for family health expenses
$3,000
$4,000
The hypothetical illustration assumes payroll deduction HSA contributions, a 25% 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 pretax 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 Gains
Any gains on the Seavers’ HSA are tax-free, so they’re keeping any money their account earns. Even with a modest rate of return, earnings can really boost the amount of money the Seavers have to cover their out-of-pocket medical costs.
Tax-Free Withdrawals
When the Seavers use money from their HSA to pay for qualified medical expenses like a visit to the doctor or to fill a prescription, they don’t pay taxes on the money they withdraw.
