Do the Payroll Tax Benefits of an HSA Really Matter over the Long Haul?
by your Health Savings Academy | Originally Posted Here
Health Savings Accounts offer tax benefits that no other long-term account can match. But do those additional savings really matter over time?
Many Americans have a math phobia. When people start talking about numbers - tax rates, returns on investment, incomes, etc. - they quickly turn their attention elsewhere. Too bad. Often, people can leverage small changes in spending or investing to create results out of proportion to the simple adjustment.
Saving for retirement falls into this category. People who understand how Health Savings Accounts work and their tax advantages versus other retirement accounts can generate more spending power in retirement without diminishing their lifestyles today. That's a great way to craft a more secure financial future.
Let's explore how leveraging a Health Savings Account to increase your spending power in retirement.
Tax Treatment
Most Americans save for retirement through a tax-deferred 401(k) plan or similar workplace-based program. The lure is that contributions are excluded from taxable income. Thus, if you contribute $1,000, the full amount is deposited into your plan before income taxes are applied. You then pay income taxes on distributions, when the account has a higher balance but, at least in traditional thinking, marginal tax rates are lower (an assumption that may not hold true for future retirees).
Health Savings Accounts differ from 401(k) plans in their tax treatment in two distinct ways:
Contributions aren't subject to federal payroll taxes (7.65% on the first $137,000 of income in 2022).
Distributions aren't included in taxable income if the funds are used to reimburse qualified medical, dental, vision, over-the-counter, or premium expenses.
Does this tax treatment make a difference? Let's see.