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A Smart Move for Your Tax Refund

Mar 18, 2020 8:00:00 AM

If you’re on track to receive a tax refund this year, now is the time to figure out how to make the most of the money coming your way. And while it might be tempting to make a splurge or impulse buy, you should take a moment to consider how investing your tax refund in your HSA may be a better option for your short and long-term financial health. In fact, many would argue that contributing your tax refund to your HSA is the best use you can make of those extra dollars.

A Refresher on HSA Contribution Limits

Before you get ready to round up your tax refund and invest it all in your HSA, remember that the IRS does set maximum annual HSA contributions limits. For the 2019 tax year, you can contribute up to $3,500 if you have individual coverage or up to $7,000 if you have family coverage. For 2020, those limits increase to $3,550 for those with individual coverage or up to $7,100 for those with family coverage. And for either year, if you’re 55 or older, you can contribute an extra $1,000 to either coverage option as a catch-up feature.

So, be sure to check where you’re at from an HSA contribution standpoint for the year before adding your tax return into your HSA mix. Because if you don’t and you end up over-contributing, you’ll be subject to IRS taxes and penalties.

Why Investing Your Tax Refund in Your HSA Makes Sense

Assuming you haven’t already maxed out your HSA contributions for the year, contributing some or all of your tax refund to your HSA provides a variety of upsides.

For one, once in your HSA, your tax refund benefits from the same tax advantages as the rest of your HSA contributions. And that “triple tax advantage” can make a real difference today and in the future. Your tax refund contribution is tax deductible, can be used tax-free for any qualified medical expenses and grows tax-free in your HSA.

On top of the numerous tax advantages, contributing your tax refund to your HSA also allows you to leverage an HSA’s infinite rollover capability, as well as its portability. What that means is you’ll never be faced with a “use it or lose it” scenario when it comes to your tax refund contribution—or any of your HSA funds—regardless of job changes, health insurance plan changes or even retirement. The contributions in your HSA will always remain available to use for qualified medical expenses in the same tax-advantaged way as the day you set your HSA up, and any funds left in your HSA at the end of the year or after a change roll over indefinitely with no penalties or charges.

And quite possibly the most compelling argument for contributing your tax refund to your HSA is the fact that HSAs provide you with an additional investment opportunity. An industry-leading HSA account like Bend HSA provides you with the ability to invest your HSA contributions like a 401(k), helping you save even more for retirement while continuing to grow your healthcare savings. And in fact, should you decide to use your HSA contributions for other purposes after retirement, you can do so without penalty.

Time it Right, Hit Your Maximum and Save Even More on Your Taxes

If you want to maximize the impact of your tax refund contribution, time it right and hit your maximum annual HSA contribution limit. If you do that, you’ll stand to save the most in taxes while growing your HSA.

From a timing perspective, you need to be aware of the yearly contribution deadline for health savings accounts. Annual HSA contributions need to be made by the tax filing deadline for the given tax year. For the 2019 tax year, the HSA contribution deadline is April 15, 2020. Even if you file a tax extension with the IRS, you still need to abide by the HSA contribution deadline for the tax year.

So, if you time it right, you can simply contribute your tax refund to your HSA before the contribution deadline and you’ll pay even fewer taxes. And remember, the more you contribute, the more you stand to save—so consider hitting the maximum annual HSA contribution limit for your specific situation.

It’s Never too Early to Plan for Retirement

Regardless of your age or proximity to retirement, if you invest wisely in your HSA, it can pay off in more ways than one.

The more you contribute to your HSA—tax refund or otherwise—combined with the tax-free growth of your HSA investments and interest, will set you up to be able to comfortably fund your medical expenses in retirement exclusively through your HSA. With the right HSA strategy, you won’t need to tap into any of your other investments for medical costs—meaning your 401(k), IRA, pension or other funds will be freed up to be used for all the other expenses that come with retirement.

And when you consider that a married couple will on average need $285,000 for medical expenses throughout their retirement, you can see just how important it is to consider your HSA as a long-term investment vehicle beyond just your yearly medical costs.

Need an HSA to Get You on Your Way? Partner with Bend.

Remember, investing your tax refund in your HSA is a smart move that’ll benefit you both short and long-term.

Another smart move is making sure your HSA provider is giving you all the tools you need to maximize your HSA. Bend HSA specializes in providing the industry’s best health savings accounts and empowering you to maximize your HSA benefits while eliminating headaches. Open your Bend HSA today.

And please remember, all the HSA tax information provided within this post is for your reference only—Bend does not provide official tax or legal advice. Always consult with your qualified tax or legal adviser if you need additional help regarding your specific tax situation.

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