Last week, a law firm owner came into my office frustrated about her rising healthcare costs. She had recently switched to a high-deductible health plan to save on premiums but was worried about the increased out-of-pocket expenses. When I mentioned Health Savings Accounts (HSAs), she gave me a puzzled look and said, "Isn't that just like my FSA?"
That moment reminded me how often this powerful financial tool gets overlooked or misunderstood, even by savvy professionals like yourself.
Here's what many don't realize: while FSAs have a "use-it-or-lose-it" policy, HSAs offer something remarkable – they're the only account that gives you triple tax advantages. Think of it as getting three tax breaks for the price of one contribution. As someone who helps law firm owners optimize their tax strategies, I can tell you this is as close to a "perfect" tax-advantaged account as you'll find.
Let me share what happened with another client, a solo practitioner who was skeptical about HSAs at first. She was spending $24,000 annually on a family health insurance premium and had various medical expenses throughout the year. By switching to a qualifying high-deductible health plan and maximizing her HSA contributions, she not only reduced her premium by $1,800 but also saved nearly $3,000 in taxes.
The best part? The money she didn't use for healthcare expenses became part of her retirement strategy.
Here's what makes HSAs uniquely powerful for law firm owners:
First, your contributions are tax-deductible, reducing your taxable income for 2024 (yes, you can still contribute for 2024 until April 15th, 2025!). For 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage. If you're 55 or older, you can add an extra $1,000 catch-up contribution.
Second, the money grows tax-free. Unlike an FSA, there's no deadline to use the funds. You can invest them for long-term growth, creating a healthcare nest egg that compounds over time.
Third – and this is where it gets really interesting – withdrawals for qualified medical expenses are completely tax-free. No other account offers this triple tax advantage.
But here's where many law firm owners miss an opportunity: HSAs can be a powerful part of your retirement strategy. Think about it – healthcare costs are often one of the largest expenses in retirement. By building up your HSA now, you're essentially creating a tax-free fund for future medical expenses.
I recently worked with a law firm owner who had been maxing out her 401(k) but wasn't aware she could contribute to an HSA. We ran the numbers and found that by redirecting some of her savings to an HSA, she could save an additional $2,000 in taxes annually while building a dedicated healthcare fund.
The strategy that really opened her eyes was what I call the "HSA Bridge Strategy." Instead of using HSA funds for current medical expenses, she began paying those costs out of pocket, keeping receipts for future tax-free reimbursement. This allowed her HSA investments to grow tax-free for decades. It's like having a Roth IRA specifically for healthcare expenses.
Here's something crucial to remember: If you're eligible for an HSA in 2024 (meaning you had a qualifying high-deductible health plan), you have until April 15th, 2025, to make your contribution and claim the deduction on your 2024 taxes. That's right – you can still reduce your 2024 tax bill even though we're already in 2025.
But there's a catch: You must have a qualifying high-deductible health plan to contribute. If you're considering switching to one, now is the perfect time to evaluate your options. The decision isn't right for everyone, but for many law firm owners, the combination of lower premiums and tax advantages makes it worth exploring.
Take a moment to check if your current health plan qualifies for an HSA. If it does, you might have an opportunity to save significantly on your 2024 taxes while building long-term financial security.
Additional Information:
For more information, visit High Deductible Healthcare Plan from Healthcare.gov.
Curious as to what expenses are covered with an HSA? Visit IRS Publication 502.
