Month: January 2026

When it comes to reducing your tax burden while preparing for healthcare expenses, Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) can be powerful tools. While both accounts allow you to pay for qualified medical expenses with pre-tax dollars, they operate differently and offer distinct tax advantages depending on your financial situation and health coverage. Understanding how these accounts work can help you make more informed decisions during open enrollment and throughout the year.

A Milford resident was looking to start the year off on the right foot, by utilizing the HSA and FSA accounts offered by her employer. But first she wanted to have a better understanding of the tax advantages of each. For this, she contacted the team at Merrimack Tax Associates.

The Tax Advantages of Health Savings Accounts

An HSA is available to individuals and families enrolled in a high-deductible health plan (HDHP). What makes HSAs especially attractive is their unique “triple tax advantage,” a benefit not found in many other savings vehicles. Contributions to an HSA are tax-deductible or made pre-tax through payroll, reducing your taxable income for the year. Funds in an HSA grow tax-free. Any interest, dividends, or investment gains earned within the account are not taxed, allowing your balance to compound over time. Withdrawals used for qualified medical expenses are also tax-free. This includes costs such as doctor visits, prescriptions, dental care, vision services, and many other healthcare expenses.

Any unused funds roll over from year to year with no expiration. Many people even use HSAs as a long-term savings strategy, allowing balances to grow and be used later in retirement for healthcare costs, which are often a significant expense in later years.

The Tax Advantages of Flexible Spending Accounts

FSAs are typically offered through employers and allow employees to set aside pre-tax dollars for eligible medical expenses. Like HSAs, contributions reduce taxable income, resulting in immediate tax savings. One key benefit of an FSA is that the full annual election is available at the beginning of the plan year, even though contributions are made gradually through payroll deductions.

FSAs can be used for a wide range of out-of-pocket healthcare costs, including copays, deductibles, prescriptions, and certain over-the-counter items. Some employers also offer dependent care FSAs, which allow pre-tax dollars to be used for childcare or elder care expenses.

FSAs come with stricter rules. Most are subject to a “use-it-or-lose-it” provision, meaning unused funds may be forfeited at the end of the plan year. Some plans offer a grace period or allow a limited amount to roll over, but these features vary by employer and plan design.

Choosing the Right Account for You

Both HSAs and FSAs provide valuable tax savings, but the best option depends on your health plan, spending habits, and financial goals. HSAs are often ideal for those who want long-term flexibility and the ability to save for future medical costs, particularly if they are comfortable with a high-deductible plan. FSAs may be better suited for individuals who expect predictable medical expenses within the year and want immediate access to funds.

In some cases, it may even be possible to use both accounts, depending on plan rules and eligibility. Working with a tax professional can help you evaluate how these accounts fit into your overall tax and financial strategy.

This Milford resident now has a better understanding of how each account works and the opportunity to offer plenty of tax advantages for each.

Individual Retirement Accounts (IRAs) are a cornerstone of retirement planning, but not all IRAs are taxed the same. Two of the most common options, Traditional IRAs and Roth IRAs, each offer distinct tax advantages that can significantly impact both your current tax bill and your future retirement income. Understanding the key tax differences between these accounts can help taxpayers make more informed decisions when planning for the long term.

A Manchester resident was just starting off in his career. Understanding the importance of planning for retirement early, he wanted to start off on the right foot but wasn’t sure which account would be the best option. For a better understanding, he reached out for advice from the team at Merrimack Tax Associates.

The Benefits of a Traditional IRA

A Traditional IRA is designed to provide an upfront tax benefit. Contributions may be tax-deductible, depending on your income level and whether you or your spouse are covered by an employer-sponsored retirement plan. When contributions are deductible, they reduce your taxable income in the year they are made, which can result in immediate tax savings. However, the tax advantage of a Traditional IRA is deferred rather than eliminated. Withdrawals in retirement are taxed as ordinary income, regardless of whether the funds come from contributions or earnings. This means the money you take out later will be subject to income tax at your tax rate at the time of withdrawal.

Traditional IRAs are also subject to required minimum distributions (RMDs). Beginning at the age mandated by current tax law, account holders must start withdrawing a minimum amount each year, whether they need the income or not. These required withdrawals can increase taxable income in retirement.

The Benefits of a Roth IRA

A Roth IRA operates in the opposite way from a tax standpoint. Contributions are made with after-tax dollars and are not deductible. While this means there is no immediate tax break, the long-term benefits can be substantial. The primary tax advantage of a Roth IRA is that qualified withdrawals are completely tax-free. This includes both contributions and earnings, provided certain requirements are met, such as holding the account for the required period and reaching the appropriate age. Because withdrawals are not included in taxable income, Roth IRAs can provide significant flexibility in retirement tax planning.

Another notable tax advantage is that Roth IRAs are not subject to required minimum distributions during the account owner’s lifetime. This allows funds to remain invested and continue growing tax-free for as long as the account holder chooses. This feature can be particularly valuable for individuals who do not need the funds immediately and want to manage taxable income in retirement more strategically.

Choosing the Right Strategy for Your Retirement Savings

From a tax planning perspective, the decision between a Traditional IRA and a Roth IRA often comes down to when you want to pay taxes. A Traditional IRA generally benefits taxpayers who expect to be in a lower tax bracket in retirement than they are today. In contrast, a Roth IRA may be more attractive for those who anticipate higher tax rates in the future or who value tax-free income later in life. Income limits also play a role. While anyone with earned income can contribute to a Traditional IRA, the deductibility of those contributions may be limited. Roth IRA contributions are subject to income thresholds, which can restrict eligibility for higher earners.

Working with a tax professional can help ensure your retirement contributions align with your overall tax strategy, allowing you to balance current tax savings with future tax efficiency and maximize the benefits available under the tax code.

The Manchester resident was pleased to gain a better understanding of his options for saving for retirement. With the help of Merrimack Tax Associates, he was able to choose the right retirement account for his situation.