TODAY ON REASONED REFLECTIONS:

• Personal finance articles 💰;

• Can you share Reasoned Reflections with your network?;

• HSAs can save you on taxes;

• Quote of the Reflection.

Personal Finance Articles 💰

Time for a bit of R&R

• Tips for a successful life

  My Take - Focusing on what provides our life with the most value is important. What other people are doing is irrelevant! Stop fixating on what other people are doing (I struggle with this!) and find joy in your own life.

• I can handle my financial situation

  My Take - Positive affirmations and self-talk can go a long way! No matter what kind of financial situation you are facing, you can handle it. We were made to do hard things!

• The #$1 rule!

  My Take - This is a great rule, and I’ve been saying something similar over the years. An expensive item can be worth it when you amortize it! That’s how I justify paying for my Lululemon pants—I amortize the price per wear. My pants are basically pennies at this point, which may explain some of the stitching beginning to unravel… 

• Money anxiety

  My Take - Welp, I’ve definitely struggled with money dysmorphia—thinking my financial health is worse than its actual state. This solidifies why budgets are so important! Budgets tell your money where to go rather than you wondering where it all went.

• 401(k) changes

  My Take - Saving for retirement is important but so is paying off debt. The Secure Act 2.0 now makes it easier for employees to treat student loan payments like contributions and still receive an employer match. Nice! 

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Reflection No. 12: HSAs and Taxes

I - Issue: What are the tax benefits of a Health Savings Account (HSA)?

R - Rule: An HSA offers three primary tax advantages: contributions are tax deductible, earnings are tax free, and withdrawals are tax free when used for qualified medical expenses. Section 223 of the Internal Revenue Code outlines HSA eligibility and contribution limits.

A - Analysis: HSAs are often called triple tax-advantaged accounts, but what does that mean? Let’s dive in!

First, contributions to an HSA are tax-deductible, regardless of whether you itemize deductions on your tax return or not. Translation: HSA contributions are an above-the-line deduction (I see you, fellow tax nerds!). The money you contribute lowers your taxable income, so you pay less to Uncle Sam. The income tax deduction makes HSAs particularly attractive for those who want to reduce their taxable income while saving for healthcare.

Second, earnings within the HSA grow tax-free. Tax-free growth is where HSAs start to resemble retirement accounts like IRAs or 401(k)s. Unlike other savings vehicles, the interest or investment gains you accumulate within the HSA are not subject to taxes. Over time, if you invest your HSA funds in mutual funds or stocks, your balance could grow significantly without being taxed along the way. The advantage here is clear: while you might be taxed on earnings in a regular savings account, with an HSA, your growth remains untouched by the IRS.

Third, withdrawals from an HSA are tax-free if you use the money you withdraw for qualified medical expenses. Qualified medical expenses could include doctor’s visits, prescription medications, and even over-the-counter items. Unlike a 401(k) or traditional IRA, where you pay taxes on withdrawals in retirement, an HSA lets you use your savings/investments tax-free when spent on healthcare. Let’s say you’ve accumulated $20,000 in your HSA by age 65. If you need surgery or medical care, you can pay those bills with your HSA funds without paying any taxes. Music to my ears!

You also have flexibility in how you use the funds. After you turn 65, funds in your HSA can be withdrawn for any purpose—though non-medical expenses will be taxed similarly to a 401(k) withdrawal. However, there’s no penalty for these non-medical withdrawals after 65, making HSAs a potential supplement to your retirement strategy (there is a 20% penalty on non-medical withdrawals before the age of 65, however).

Additionally, since you can only contribute to an HSA if you are enrolled in a high-deductible health plan, your HSA contributions can work hand-in-hand with managing those high out-of-pocket costs. And because HSAs never have a “use it or lose it” rule like Flexible Spending Accounts, your savings can continue to build year after year.

Another perk to consider is that HSAs are portable. Portability means you keep the account even if you change jobs or retire. The money in the account is yours to use whenever without being tied to any specific employer.

Finally, one overlooked advantage is that you also save on FICA taxes (the payroll tax that helps fund Social Security and Medicare) on any HSA contributions made directly from your paycheck. If your employer sponsors an HSA, you should definitely make contributions directly from your paycheck—rather than on your own—to save on your 7.65% share of FICA taxes.

C - Conclusion: HSAs are an excellent healthcare and retirement planning tool thanks to tax deductible contributions, tax free growth, and tax free withdrawals.

Time to Reflect…

HSAs offer a rare triple tax advantage, ideal for managing healthcare costs and supplementing retirement savings. Contributions lower taxable income, earnings grow tax-free, and withdrawals for medical expenses avoid taxes entirely. At 65, you gain added flexibility to withdraw funds for any purpose (taxable for non-medical uses but without those darn penalties), making HSAs a versatile tool for health and long-term financial planning.

Quote of the Reflection

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