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- Health savings accounts offer three tax benefits for savers at all income levels, as long as you have an HSA-eligible high-deductible health insurance plan.
- You can withdraw HSA money anytime for qualified medical expenses, or you can carry over the balance from year to year. Some HSAs allow you to invest, giving you the opportunity to grow your balance for future medical expenses.
- If you qualify, you can contribute to a company plan or open an HSA on your own, and both options are portable.
- I have over $11,000 saved in my HSA, but I don’t use it for my out-of-pocket healthcare costs. Instead, I’m investing the entire balance to help pay healthcare costs in retirement.
- Prepare for tomorrow with Lively, the modern HSA »
When you’re comparing health-insurance options, high-deductible health plans may not be your first choice – and it’s easy to see why. Though monthly premiums may be cheaper, your out-of-pocket expenses can be significantly higher, which can make budgeting a challenge. And if you have a chronic illness like diabetes, you may skip some care altogether, studies have found. Whether you’re healthy or not, high-deductible health plans aren’t affordable for most people. But if you’re someone who can afford to make it work, you may benefit from pairing your high-deductible insurance plan with a health savings account. That’s what I do – however, I don’t use my HSA money to pay for my out-of-pocket healthcare costs. I have much bigger plans for those funds.
Health savings accounts have a ‘triple tax advantage’
It’s tough to see any benefit of paying out-of-pocket expenses, but high-deductible health plans do have one valuable perk: the ability to qualify for a health savings account – and the tax benefits that come with it.
Before getting started, you will need to make sure you’re eligible to contribute. To qualify, you must have an HSA-eligible high-deductible health plan. These insurance plans have a deductible of at least $1,350 for an individual or $2,700 for a family plan in 2019. This means you have to pay more expenses on your own before insurance kicks in. If your company offers an HSA – and many companies do – there are several reasons to take advantage. Some of the most important are the three distinct tax benefits for eligible folks at all income levels:
- You can contribute to your HSA before paying federal taxes and take an income-tax deduction, even if you don’t itemize.
- If your HSA allows you to invest, you can earn tax-free interest on the balance. There is no deadline to use the money, and you can keep the account when you change jobs.
- You can spend your HSA money on qualified medical expenses anytime you want – and best of all, you won’t owe extra money for taxes.
Also, your HSA money rolls over from year to year, meaning you aren’t under a deadline to use it as you might be with an FSA. However, if you want to use that money for expenses that don’t qualify, you’ll pay taxes and steep fees.
If your company doesn’t offer an HSA, you’re free to shop around for the best plan on your own. I chose Lively for my HSA. Its accounts are among the most competitive with no fees and with investment options through TD Ameritrade. Full disclosure: I write for Lively, but I opened my account long before I started working for the company.
Why I don’t spend my HSA money
Though most people keep their HSA in cash for short-term expenses, over 1 million accounts are now investing at least a small amount, a recent report from Devenir said. I invest my entire HSA balance for one reason: to build a nest egg for healthcare expenses in retirement.
After age 65, you can use your HSA money for any costs and pay regular income tax but no penalties or fees. Or you can use it for qualified healthcare expenses in retirement and pay no taxes or fees at all.
Once you learn about the time value of money, it’s difficult to ignore the numbers. The basic premise is simple: Your money may be worth more in the future because it can grow. Just $100 today may be worth $148.02 in 10 years, assuming you can earn a 4% annual return.
A one-time $3,500 deposit – the HSA contribution limit for 2019 – could grow to $11,351.80 in 30 years, using the same assumptions. If you contribute the maximum amount each year for 30 years, it’s easy to see the growth potential.
I pay for out-of-pocket expenses now for future growth
This month, I received a bill for $170 from my eye doctor, which was a lot more than I was expecting. I could have easily covered the bill with my HSA balance – and believe me, I wanted to.
But the cost of future HSA growth was too high. After crunching the numbers, I could see that by keeping $170 invested in my HSA, it could be worth $551.38 in 30 years, assuming a 4% annual return.
While I’m free to spend HSA money on expenses now, I would prefer to have more saved for the future. I also have an IRA and a solo 401(k) to save for retirement.
The cost of healthcare in retirement only continues to grow. The average 65-year-old couple will need $285,000, a recent Fidelity report said – and that doesn’t include long-term care. Any amount of HSA money can help.
By maxing out my account and investing the balance, I’m hoping to grow a decent-sized nest egg for the future.