There are a few major benefits that come with having and using a Health Savings Account (HSA). Some of these HSA benefits include saving on taxes for health care costs, planning for retirement, and staying in control of your money. If you need a refresher on some basics before diving into the details of these advantages, check out our HSA Guide.
HSA Benefit 1: Save on medical expenses
One of the major benefits of an HSA (that you may already be familiar with) is that it’s funded with pre-tax money. That means that you save money every time you use your HSA to pay for health care expenses.
To open an HSA you must also enroll in a qualifying High Deductible Health Plan (HDHP). Plus you must meet a few other requirements laid out in IRS Publication 969. A HDHP can lead to a higher out-of-pocket healthcare cost as you work towards paying the deductible. That is why you can open an HSA to help pay towards your higher deductible.
If you have an employer sponsored HSA , make sure you select to open an HSA during open enrollment. If you don’t, you may miss your chance to receive free money from your employer. During enrollment you will choose how much you want to contribute to your HSA. Most often, your contributions are made every pay period via payroll deductions.
One of the reasons an HSA is so beneficial is that you own it and can keep it as long as you’d like. You can only open an HSA and contribute funds while enrolled in a HDHP, but you can use those funds anytime. This means you can save money on medical expenses now and in the future.
HSA Benefit 2: Save on taxes
HSAs have a “triple tax advantage.” This means you save on taxes when you contribute, as your money grows, and when you withdraw funds.
- Contribute pre-tax funds. Once you’ve opened an HSA you can begin contributing funds. Many choose to have HSA contributions deducted from every paycheck. You can also elect to make a one-time contribution if needed. If you have an employer sponsored healthcare plan, they can take your contributions out of your paycheck on a pre-tax basis. If you enroll in a private market plan, then your contributions are tax deductible.
The Internal Revenue Service (IRS) determines the contribution limits for HSAs every year, which are different for individual and family accounts. If you are over 55 you can also make an additional catch up contribution of $1,000.
- Grow your funds tax-free. Earnings in your HSA from interest and investments are tax-free. This makes an HSA a great way to save for the future, as you won’t be paying tax on your money as it grows.
- Withdraw funds tax-free when using them on qualified expenses. HSA funds that used to pay for qualified healthcare expenses are not subjected to taxes. This is true at any age and for any qualified expense. The IRS determines what counts as qualified healthcare expenses. This includes deductibles, copays, prescriptions, and much more. For a full list, check out our guide to “What’s Eligible.”
HSA Benefit 3: Grow your money
You can invest an HSA, which is a fact that some may not realize. Only a little over 4% of HSAs in the U.S. have some part of their funds invested. The other 96% of HSA account owners could be leaving money on the table. We recommend chatting with your financial advisor before investing. Everyone's financial situation is different, and they can help choose what's the best.
How much you contribute to your HSA will also depend on your personal financial situation and long term goals. If you know you will be having an expensive medical cost soon, it may be smart to have more liquid assets in your HSA to pay for those expenses. If you don’t foresee spending much, it could be a good idea to invest more of the money in your HSA. If your employer offers any kind of contribution or match to your HSA, make sure you take advantage of that extra funding.
It's important to note that investing funds is never a sure thing. There is a possibility that conservative investing can help your money grow faster than by earning interest alone. This can help you reach your retirement goals earlier or build up your HSA balance to pay for a big medical expense in the future.
HSA Benefit 4: Maintain control of your money
Unlike an FSA, you own your HSA account, and can take it with you when you move from one employer to the next. This means you maintain control of your funds and can plan out how you want to save or spend across your lifetime. You are in charge of how much you want to contribute, if you want to invest, and when and how you use your HSA.
Plus, HSAs don’t have use-it-or-lose-it rules like FSAs. If you don’t spend funds in a given year, they stay in your account for the future. This is an essential aspect of planning for long-term medical expenses. You can build up your savings when you are in a position to do so, like when you may have more income and fewer expenses. Then you don’t have to touch them if you don’t want to. They will be waiting for you to use when you need them down the line.
HSA Benefit 5: Save for retirement
At any age, you can use HSA funds for qualified medical expenses tax-free. As we get older, we tend to have more medical-related expenses pop up. An HSA can be a great way to plan on taking care of those expenses. It even works for many expenses that Medicare and other health insurance plans don’t cover.
If you use HSA funds for non-qualified expenses before the age of 65, you will receive a 20% tax penalty on those funds. After the age of 65, that penalty no longer exists. You can use your HSA funds for something other than a qualified healthcare expense and pay regular income tax as you would with a 401(k) or IRA.
This is a feature that makes HSAs particularly good for saving for retirement. You can contribute money knowing that it's likely you’ll have medical expenses come up as you age. But if you have an unforeseen expense come up during retirement, you also have those HSA funds available. It’s a win-win.
As you can see, there are many benefits that come with having an HSA. From saving money to planning for retirement, if you are considering opening an HSA, get in touch with Lively today.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.