When you start your job as a new attending physician, you may be faced with an overwhelming number of options for health insurance. One option usually stands out to us and our clients above the rest, because it gives you the opportunity to set aside money into a special type of account with substantial tax benefits and flexibility. The account is called a Health Savings Account (which I will refer to in the remainder of this article as an HSA). It is typically available to new attending physicians who enroll in a high-deductible health plan.
At its core, an HSA is an account that allows you to set aside money for healthcare expenses, including doctor’s visits, prescription medications, and even some dental and vision expenses.
What makes HSAs so great is that they offer young attending physicians a “triple tax benefit.” This major tax savings can be broken down into three parts: tax-deductible contributions, tax-free growth, and tax-free withdrawals.
Tax-Deductible Contributions
When young attending physicians contribute to their HSA, they reduce their taxable income dollar for dollar. For example, suppose a new attending physician that earns $250,000 contributes the maximum amount possible to their HSA ($7,750 for family coverage for 2023). This reduces their taxable income to $242,700. If they are in the 35% federal tax bracket, contributing $7,750 reduces their tax liability by over $2,700. That is some major and immediate tax savings!
Many employers allow you to contribute directly to your HSA from your paycheck. When paired with other pre-tax contributions, like your company-provided 401(k), new attending physicians can save significantly on taxes.
Tax-Free Growth
The second tax benefit is tax-free growth of the money within an HSA. Once contributed, the money held within an HSA can be invested in various investments, including stocks and mutual funds. A young attending physician would obviously be investing this money in hopes that it would benefit from the long-term growth of the financial markets over time. If so, the earnings from these investments get to grow tax-free. This is a significant advantage because in a traditional investment account, that same growth would be subject to taxes. In contrast, the growth in the HSA is entirely shielded from taxation.
Over long periods of time, physicians will start to experience the phenomena of compounding returns, where the earnings themselves generate additional earnings. Over time, the effect of compounding can significantly increase the overall value of the HSA. The tax-free nature of these gains further enhances the benefit of this growth.
For example, if a young attending physician contributed and invested $5,000 in their HSA every year, and experienced an average annual return of 8%, their account could be worth over $600,000 after thirty years. This growth, unhindered by taxes, makes for an efficient way for young attendings to build wealth for healthcare expenses.
Tax-Free Withdrawals
The third major tax benefit is tax-free withdrawals. When money inside an HSA is used for qualified medical expenses, such as doctor’s visits, prescriptions, and certain medical procedures, the withdrawals are entirely tax-free. This is important because it means that every dollar spent on healthcare costs comes directly from the HSA balance, free from taxes. For example, if a physician has $5,000 in their HSA and uses it to pay $5,000 in medical bills after a major operation, they don’t have to withhold any taxes from the withdrawal, nor do they incur any additional taxes when filing for the year.
Additional Flexibility in Retirement
While HSAs are designed for healthcare expenses, they do offer significant flexibility for retirees. While retirement might not be top of mind for a young attending, it doesn’t hurt to know that your health care savings strategy is also fortifying your future nest egg.
Here’s how this flexible aspect plays out. Once you reach age 65, your HSA funds can be withdrawn for any reason without incurring the 10% penalty! You will still have to pay income tax, similar to a Traditional IRA. This means you can effectively convert your HSA into a retirement account, using it to cover living expenses in retirement while potentially paying less in taxes compared to other income sources. So add your HSA to one of the key contributors to your overall retirement strategy.
How you know if you’re eligible
To be eligible for an HSA, you must be enrolled in a qualifying high-deductible health plan (HDHP) that fits IRS guidelines for that plan year. It’s likely that your workplace benefits guide will tell if you are eligible for an HSA or not, based on your health insurance plan.
The “triple tax benefits” make HSAs one of the most tax-efficient financial tools available for new attending physicians. So, as you’re reviewing your benefits package for your new job, pay extra close attention to the availability of an HSA. It could pave the way to a great financial future!
Panoramic Financial helps new attending physicians make the most of their new job’s benefits, including the use of HSAs. Please click the “Work With Us” link at the top to learn more.
*Investment returns are not guaranteed. Investing in securities involves risks, including the potential for loss of principal. Estimate is for illustration purposes only, is based on annualized returns of 8%, and is not intended to be representative of any specific investment or strategy.