Close this search box.

Tax Tips: 3 Reasons to Consider Adding an HSA to Your Tax Planning Strategy

Most employers require you to select your benefits package during an open enrollment period each fall, and this is a key opportunity to make some tax saving decisions. Most W-2 wage employees are aware of the importance of contributing to their 401(k) plan each year, but are they missing out on an even better tax savings opportunity? For many employees, contributing to a Health Savings Account (HSA) can provide a higher tax benefit as well as easier access to the funds (prior to retirement) for qualified medical costs.

HSA health savings account personal banking HFG Trust

Who can contribute to an HSA?

You can contribute to an HSA if you are not enrolled in Medicare, and your medical health plan qualifies as a High Deductible Health Plan (HDHP). For 2020, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual, or $2,800 for a family. Additionally, an HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,900 for an individual, or $13,800 for a family (this limit doesn’t apply to out-of-network services.)  If you’re not sure which plan offered by your employer will qualify as an HDHP, consult with your HR or benefits department during open enrollment.

How much can you contribute to an HSA?

The 2020 contribution limits are $3,550 if you are the only person covered by your insurance plan, or $7,100 if you have family coverage. Additionally, if you are age 55 or older, you can contribute an additional $1,000 per year. These annual limits apply to combined employer and employee contributions to the HSA account; so if your employer makes a contribution to the plan on your behalf, the amount you are able to contribute will be lower than what is shown above in order for the combined contributions to equal the maximum.

Triple tax benefit of HSA contributions

  • Tax benefit #1: Your HSA contribution reduces the portion of your wages that are subject to federal income tax.
  • Tax benefit #2: If your gross W-2 wages in 2020 do not exceed $137,700, your HSA contribution will also avoid 7.65% of FICA (Social Security) and Medicare tax on the contributed amount (if your gross wages exceed $137,700, you will only avoid the 1.45% Medicare tax on the HSA contribution amount.)
  • Tax benefit #3: If you use your HSA funds to pay for qualified medical expenses, any earnings on the account will also be tax-free.

Tax benefit #2 is unique to HSA accounts, and this is the primary reason they provide a higher lifetime tax benefit than a 401(k) account. Additionally, there are only a few rare instances when you can withdraw money from your 401(k) prior to retirement without paying a penalty; but the HSA funds are available penalty and tax free at any age as long as they are used to offset qualified medical costs (see IRS publication 969 for details on what qualifies

Contribution recommendation: match, HSA, non-match

Ideally, you will have sufficient income to allow you to contribute to both your 401(k) and an HSA plan each year. If this is the case, I recommend prioritizing your plan contributions as follows:

  • Priority #1: Contribute enough to your 401(k) to maximize the amount of employer matching contributions for which you are eligible.
  • Priority #2: Contribute the maximum amount to your HSA plan.

If you have covered these first two and can invest more of your wages for retirement, contribute as much as you are able to your 401(k) plan.

In summary, if an HSA plan is available through your employer and you qualify to contribute, don’t miss the opportunity to add HSA contributions to your overall tax and retirement planning strategy. Combining the tax benefit and easy access of an HSA with the long-term retirement funding of a 401(k) is a wise move.

K. Paul Hansen, CFP® CPA


This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Community First Bank, HFG Trust, and HFG Advisors have no duty or obligation to update the information contained herein. Further, Community First Bank, HFG Trust, and HFG Advisors make no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is potential profit there is possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services, banking services, or an offer to sell or solicit and securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Community First Bank, HFG Trust, and HFG Advisors believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, included the information contained herein, may not be copied, reproduced, republished, or posted in any form without the prior written consent of Community First Bank and/or HFG Trust and/or HFG Advisors. HFG Advisors, Inc, is a wholly owned subsidiary of HFG Trust, LLC. HFG Trust, LLC is a Washington state-registered Trust company and wholly owned subsidiary of Community First Bank.