Episode 52: What Works Wednesday: Three Tax Breaks In One, The Health Savings Account Explained

Welcome to What Works Wednesday. Today, we're exploring health savings accounts (HSAs)—what they are, why they're important, how to qualify, and how to maximize their benefits. HSAs are powerful yet underutilized tools that offer triple tax advantages: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for medical expenses. Let's dive into how to make the most of your HSA.

Transcript: 

Welcome back to another episode of What Works Wednesday. I'm your host, Leland Gross. And today I want to talk about all things health savings accounts. So HSAs, I want to talk about what it is, why it's important, how you qualify for it, and then how you use it to the best of its ability. Because HSAs truly are one of the most powerful investment account tools for both investing, taxes, life planning. They're incredibly powerful.

And yet they're one of the most overlooked and underutilized tools I've come across in my practice. Very few people have an HSA, know about an HSA, or if they do have it, are not using it to its full potential. So that's what I want to talk about today. All right. So what is a health savings account? So a health savings account is often confused with a flex spending account, an FSA. See, FSAs were originally created,

back in the day to be offered through employers to help you get a tax deduction to pay for medical expenses. So at the beginning of the year, you say, I want to save a thousand dollars into my FSA. You get a tax break to put money into it. And then when you take the money out to spend on medical bills or prescription drugs or anything like that, you get a, you get it tax free. The problem with FSAs are it doesn't roll over year to year. So if you don't use it, you lose it.

which means you have to really know what your medical expenses are going to be, or you're going to have to low ball them to make sure you're not just throwing money away by putting money into an FSA. Well, that's obviously problematic. And that's when the government created an HSA, a health savings account. You may have heard it as a healthcare IRA. That's another name for it. And how this account works is it's the only investment account in creation right now that offers three tax breaks on it. So when you put money in,

you get a tax break. It is a tax deduction off your income, just like you would with a 401k or an IRA or any other pre -tax benefit. So that's your first tax break, tax break now and this year to put money in. But it's invested and it grows tax deferred. You do not get taxed every year on the earnings. It just continues to grow. So that's the second one. And then third, when you get money out of the account for healthcare expenses, it's tax free.

like a Roth IRA. So when it comes to retirement savings, you get to choose one or the other. You choose either an upfront tax break with pre -tax traditional 401k IRA, or you get a Roth tax break, which is, you know, I don't get a tax break now, but the funds grow tax free later. Well, with an HSA, you actually get both. Plus you get the tax deferred earnings in the middle, which is incredibly powerful. I cannot tell you how powerful this is.