HSAs, which must be paired with high-deductible health care plans, have a triple tax advantage:

1. Contributions to your HSA account are tax-free; no income tax, no social security tax, and no Medicare tax.
2. The money in your HSA can be invested, and the income from those investments is tax-exempt. Your HSA grows tax-free.
3. When you need money from your HSA to pay medical expenses, you pay no taxes on the funds you withdraw, provided they are used to pay for a Qualified Medical Expense (QME).

There are some limitations to be aware of:

1. You can only contribute to an HSA while you are enrolled in a high-deductible health insurance plan.
2. If your employer doesn’t offer an HSA, there are available HSA providers who offer plans for individuals; however, you likely won’t be able to fund via payroll deductions, and thus, you’ll be unable to avoid Social Security and Medicare taxes on those contributions.
3. If you withdraw funds for expenses other than QMEs, you’ll pay taxes on those withdrawals, and if you are under age 65 when you make that unqualified withdrawal, you’ll pay a hefty 20% penalty on top of your taxes.

Remember that you’ll have to maintain your records to show that your insurance did not pay for the QME and that it was not claimed as a medical expense deduction on your taxes.