When Should I Open my HSA Account?

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HSA's are a smart strategy for saving and investing, but when is the right time to open an account? If you have the ability to open an HSA, do it as soon as possible so you can contribute to your tax-free savings.

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If you are eligible to save money in a Health Savings Account (HSA), the unprecedented tax break you get with an HSA is a strong argument for getting started ASAP.

To open an HSA account you must be enrolled in a high deductible health plan (HDHP). In 2020, an HDHP must charge a deductible of at least $1,400 for single coverage and $2,800 for family coverage to be HSA-eligible.

If your health insurance is provided by your employer, and you are enrolled in a HDHP, your employer may also offer an HSA. Even if you employer doesn’t sponsor an HSA, no worries, you can open an HSA on your own. Self-employed? Just make sure when you sign up for an HDHP it is “HSA-eligible.” Most are, and you too can open your own HSA account.

Triple-Tax Free Reason to Get Saving in an HSA today

Money in an HSA account qualifies for three different tax breaks. Money you contribute to an HSA reduces your taxable income for the year. The money you hold within an HSA is not taxed. When you withdraw funds out of an HSA to pay for an out-of-pocket qualified medical expense, you will not be tax on those funds.

That’s an even better deal than retirement savings in a 401(k) or IRA; those accounts only have two tax breaks.

The tax value of an HSA is a strong argument for opening an account if you are eligible to do so.

The Bonus you Don’t Want to Miss

If your employer offers an HSA, there can be a big financial win if you start saving now. Some employers chip in money to an employee’s HSA account. The average employer contribution in 2019 according to Devenir is nearly $650 per year. But there can be a catch: Some employers only make a contribution if the employee is also contributing funds. If that’s how your workplace HSA operates, you can’t afford to not contribute. The employer matching contribution is tax-free money - and there’s no reason NOT to take advantage of those funds.

Take Advantage of Time

If you intend to use an HSA as a long-term retirement savings account, the sooner you start saving, the more time your money has to take advantage of compound growth.

[__Related Reading:__ Investing Your HSA: Using Compound Growth to Your Advantage](https://livelyme.com/investing-your-hsa-using-compound-growth-to-your-advantage)

For instance, in 2020, an individual can contribute a maximum of $3,550 to an HSA (which includes any contributions an employer gives as well). The annual contribution limit is raised periodically to keep up with inflation, but let’s just assume that it stays at $3,550. If you invest that much money for the next 10 years and then let the money grow for another 20 years, your account would be worth nearly $125,000 assuming a 5 percent annualized rate of return. But if you wait 10 years to start saving, you would have less than $80,000. What you contributed was the same -- $35,500 over 10 years – but your money had 10 fewer years to keep compounding. Time is money when it comes to investing for the long-term.

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.