Are You Making the Most of Your Health Savings Account Benefits?
A Health Savings Account (HSA) is a term you’ve likely heard tossed around before—they’re a financial tool that allows you to cover the cost of health-related expenses with pre-tax funds. They can save you significant money in the here and now but believe it or not, their benefits extend far beyond the short term.
An HSA offers more than one mode of tax savings—it’s a vehicle that offers triple tax savings. You can contribute money pre-tax, withdraw the money tax-free, and pay no taxes on earnings. An HSA offers an even bigger benefit, too: you can withdraw funds now, in a few years, or even during retirement, as long as you’re using them for qualified medical expenses.
Below, I’ll discuss how you can make your Health Savings Account a part of your finances today, as well as into the future.
The Basics: How Health Savings Accounts Work
HSAs are offered at work or in a private marketplace as a part of an eligible high-deductible health plan. They offer a smart way to save while also covering current medical costs. However, many people don’t realize that, because of their triple tax-free nature, an HSA can be a powerful tool to help you save for future financial needs, too. That’s because, unlike an FSA, which you have to spend or lose, the funds in an HSA remain there year after year.
They do come with a cap—the 2022 IRS limits for contributing to an HSA are $7,300 for family coverage and $3,650 for individual coverage. Looking ahead to 2023, that number increases slightly to $7,750 for family coverage and $3,650 for individual coverage. (You may also be able to make a catch-up contribution of up to $1,000 per year if you are 55 years or older.)
Let’s take a look at some forward-thinking strategies to maximize your health savings account:
Strategy 1: Set Aside Savings for Health Care
There are a lot of things most people think to save for—retirement, college, a new car, and their first home. Your investment strategies are often oriented around a specific goal but rarely is that goal health care. It’s arguably one of the most universal needs, even though it varies greatly from person to person.
It may be unpredictable but building healthy savings just for future healthcare costs is a smart idea regardless. The Fidelity Retiree Health Care Cost Estimate found that an average 65-year-old retired couple may need approximately $315,000 post-tax to cover health care expenses in retirement.
This certainly can be accumulated in an HSA, but it’s a great idea to save for your health expenses even if you don’t have one.
Strategy 2: Invest Your Health Savings Account Dollars
Now that we know health care expenses are almost a sure thing in retirement, the question becomes how can you plan to have enough money to cover them? With rising healthcare costs and widespread inflation, it can be hard to envision a way forward.
Start by setting aside enough money to make the most of your HSA’s original strategy: covering today’s qualified medical expenses. With whatever you have left over, consider investing your unused HSA funds to help you strengthen your financial retirement strategy. Over a term of 30 years, if you invest the maximum amount into your HSA and leave the rest, you could have more than $320,000! Remember, this growth isn’t only smart—it’s tax-free.
If you’re unsure of where to invest, working with a professional can help you find the right mix of safe growth and high-yield opportunities for your HSA portfolio.
Strategy 3: How to Use Your Health Savings Account in Retirement
Looking beyond the traditional uses of HSAs—paying for qualified medical expenses like hearing aids, dental care, vision, nursing services, etc.—you can also use those funds in other ways once you retire.
- Medicare: If you retired before 65, an HSA can help you bridge the gap between your previous healthcare coverage and Medicare eligibility. There are only two situations in which this is applicable: paying for COBRA employer-sponsored coverage and paying premiums if you’re receiving unemployment benefits.
- Premiums: Though not all premiums are covered, you can use your HSA to cover certain Medicare expenses, like Part D and Part D prescription-drug coverage premiums.
- Long-term care: If you’re looking for a long-term care insurance policy, your HSA can be used to cover the cost as long as it’s tax-qualified.
Strategy 4: As a Part of Your Estate Planning
When you pass away, you may be able to pass along your HSA assets. It’s not a cut-and-dry process, but generally, if your spouse is the designated beneficiary, they will take over your HSA. If your spouse isn’t the beneficiary, the account stops being an HSA and the amount becomes taxable for whomever the beneficiary is. On the other hand, if your estate is the beneficiary, the HSA will be included on your final income tax return at fair market value.
Health Savings Account Strategy: Next Steps
You may not immediately think of an HSA when you think of planning for your long-term financial future, but you could reap significant benefits with proper planning. Take advantage of the triple-tax advantages and consider prioritizing your HSA contributions to help smartly shore up your future.
Do you have questions about these strategies? Would you like professional guidance in creating a financial plan to serve you and your loved ones? At Resolute, we believe in providing a personal perspective on wealth and helping you create a customized plan for your future. Reach out today to schedule a conversation.
