Health Savings Accounts (HSAs) are often overlooked or misunderstood, but when utilized correctly, they can provide noteworthy tax savings and wealth-building opportunities. That’s mostly due to the fact that HSAs can create dedicated, tax-free savings for all of your healthcare needs in retirement. All contributions to an HSA are tax-free, their growth within the account is tax-free, and qualified withdrawals (the money in an HSA can only be used to cover qualified medical expenses) are tax-free as well.
If you think of your retirement savings – IRAs and 401(k)s – as funds to pay for expenses in retirement such as food, housing, travel, and clothes, you can begin to see the allure that HSAs have for jump-starting your savings for healthcare costs.
Read on to learn more about HSAs along with some financially savvy strategies you can use to make your HSA work for you.
The Basics of HSAs
It’s a term you’re likely familiar with, but many people lack specific knowledge about how to best utilize this triple-tax-free tool.
What is it?
An HSA, or health savings account, is a tax-advantaged account that you can use to pay for medical expenses. Either you or your employer can contribute pre-tax money into the account, which can then be used to cover any qualified medical bills you may incur. Since your contributions lower your taxable income, this account can help you take your dollars further.
The main downfall to an HSA account is that it isn’t available to everyone. You must be enrolled in a high-deductible healthcare plan (HDHP) in order to qualify, and the definition of that changes year to year according to the IRS. Further eligibility constraints include that you are not permitted to be registered on any other health insurance plans, including Medicare, and you cannot be claimed as a dependent on someone else’s tax return.
How does it work?
If you have an HSA account, you can fund it directly from your paychecks with pre-tax dollars. Those funds are then available for you to use to cover the costs of any qualified medical expenses such as prescriptions and medications, doctors’ visits, deductibles and copays, counseling services, dental care, eye care, medical supplies, and more. Should you ever use your HSA account to cover the cost of something that doesn’t fit under the qualified expenses, you would have to pay a penalty as well as the income tax on those funds.
Making the Most of Your HSA
If you have an HSA and you aren’t sure whether you’re maximizing all the benefits, read on.
Max Out Your Contribution Limits
Each HSA account comes with a contribution limit – and one of the easiest ways to ensure that you’re getting the most out of your account is to max out that limit. Take time to compare your annual contributions to the limit to see how much more you’re able to add to your account each year. Then, if you have the available funds to do so, max out your contributions.
If you’re unable to meet your other financial needs and goals and maximize your contribution limits, then consider how much your employer contributes. If your employer contributes, fund the minimum amount need to get the contribution. If your employer matches your HSA contribution, see if you can contribute enough to max out the match. The goal is to leave no money on the table.
Utilize the Triple-Tax-Free Advantage
Many people use their HSA funds to cover the out-of-pocket medical costs that come with a high-deductible insurance plan. However, if you can manage to pay those costs with personal savings, you can use your health savings account to supercharge your retirement savings and take full advantage of its triple-tax-free nature.
That’s because, unlike most flexible spending accounts, the money you contribute to your HSA can roll over from year to year. You can earn interest on it, and you can even take it with you if you change employers or retire. That’s why maxing out your contribution limits if you can, is so beneficial. If you really want the power of the HSA to work for you, contribute the maximums and don’t tap into your funds unless absolutely necessary. Rather, let them sit in the account and grow until you retire.
Ensure HSAs are Consolidated
Because it’s common to change jobs as we move through life, some people will find themselves with more than one HSA account. If this is you, consider consolidating your accounts so that you can reach the threshold for investment and accelerate growth through interest.
Invest Your HSA Dollars
Once you reach a minimum balance in your HSA, you can begin investing in mutual funds, stocks, and bonds. The potential for tax-free growth means bolstering your savings even further, and you can choose your level of risk depending on your risk tolerance and risk capacity.
It’s important to note that not all HSAs come with this benefit, so you’ll want to check with your provider first to see if you qualify.
Make a Plan to Use Your HSA in Retirement
You’ll always have the option of using the funds in your HSA to cover current medical costs. However, if you’re able to hold off until retirement, there are a few additional ways that you can use your HSA money for maximum benefit:
- Bridging to Medicare. At 65, Medicare eligibility begins and, if you retire before then, you may need help bridging the gap until you become eligible.
- Paying Medicare Premiums. You’re permitted to use your HSA to pay for your Medicare premiums for both Part B and Part D. However, you may not use it to pay supplemental policy premiums.
- Helping to Cover Long–Term Care. HSAs can be a great resource for covering the cost of a long-term care insurance policy. You’re permitted to do this at any age but take note that the amount you’re able to use will increase as you age.
- Paying for Other Medical Expenses. Once you reach 65, you’re permitted to use your HSA dollars for any nonqualified medical expenses if you wish. However, you will have to pay state and federal taxes on those distributions, so do so cautiously.
HSAs: A Good Option for Health and Wealth
An HSA is a valuable and underutilized financial tool. It’s a great option for setting aside emergency, tax-advantaged funds for medical needs, but it can be much more than that. If looked after with appropriate care and invested strategically, your HSA can grow exponentially over time. In fact, it can even be used to supplement your retirement income down the road.
Don’t set up your HSA and forget about it. Invest your dollars with an eye on the future and your account will keep your finances looking healthy, too.
At Resolute Wealth, our advisors can help you manage every aspect of your financial life. We have the knowledge and experience to partner, educate, and guide you throughout the process to help you make well-informed financial decisions. If you have questions about your HSA or other tax-advantaged accounts, please reach out to us today.