The Informed Investor
A Health Savings Account (HSA) is a tax-advantaged medical savings account designed to help you save money for healthcare expenses and provide you with certain tax benefits for doing so. Unlike a Flexible Spending Account (FSA), which is another popular medical savings account, HSA funds do not expire at the end of the year and can be invested, which may make them useful for covering future medical expenses.
To help you decide whether using an HSA may make sense for you, we’ve broken down some of the most important factors for you to consider.
How Do HSAs Work?
Contributions to HSAs are made on either a pre-tax or tax-deductible basis and can be invested, potentially growing over time, before being used to cover eligible healthcare costs. Among the many things HSA funds can be used for are prescription medications, eye glasses or contacts, sunscreen, alcohol or drug abuse programs at a hospital, and dental, vision, and medical care for yourself, your spouse, or your dependents.
You’re able to make contributions to your HSA up to the annual contribution limit, which is prescribed by the IRS. Those over 55 years old may be able to contribute more in the form of “catch-up” contributions. You can arrange to have contributions automatically deducted from your paycheck if your employer offers an HSA, and your employer may even offer to match a portion of your contribution.
If your employer does offer an HSA, you will likely receive a card or checkbook linked to your HSA balance that can be used to cover any qualifying medical costs. If not, you can open one on your own, provided you fulfill the requirements and have a qualifying insurance plan.
Who are HSAs for?
Health savings accounts are available through your employer or established by self-employed individuals and they may be beneficial to save money for medical expenses that aren’t already covered by their existing healthcare plan.
What are Some Potential Benefits of Investing in an HSA?
Here are several of the reasons you might consider investing in a health savings account.
When it comes to using an HSA as a health savings vehicle, there are three important tax benefits to consider. When funding your HSA, you can deduct your contributions up to the IRS limit, thus lowering your taxable income. Further, any appreciation from the investments within your HSA is free from federal income taxes. And lastly, when you use your HSA to pay for qualified medical expenses, you’re not required to pay income taxes on the withdrawal.
Contributions Roll Over
The money you commit to your HSA never expires. If you move to a new state, switch jobs, lose your job, or change healthcare plans, your HSA funds will move with you. Remember that if you switch to a healthcare plan that isn’t eligible for HSA contributions, such as Medicare or another plan, you may not be able to contribute to your account without paying penalties. However, you can always use the money in your HSA balance to cover eligible medical costs. Additionally, your HSA can be passed down to an heir or another beneficiary.
You can invest your HSA funds in a variety of securities depending on the plan your participate in– such as stocks, bonds, ETFs, and mutual funds – to potentially grow your account balance over time. This can make an HSA invaluable for saving for future medical costs, such as those you might encounter in retirement.
An HSA can help you care not just for yourself, but for your loved ones, too. Even if your healthcare plan does not cover your spouse and other dependents, their eligible medical expenses can be paid for using your HSA funds. Adult children can be HSA-eligible even if they are married or do not live with you anymore, as long as they remain under your insurance plan. In most states, they can do so until they turn 26.
Prescription drugs and other qualifying costs can be paid for immediately with the debit card that’s associated with your HSA. If you are interested in paying a medical bill before it arrives in the mail, you can contact the billing department and use your HSA debit card. If you have paid a medical bill in full using another payment method, you may be able to reimburse yourself from your HSA.
Additional Retirement Savings
HSAs aren’t technically retirement accounts, but they can still prove invaluable in the pursuit of your retirement goals. If you are over 65 and healthy, you can deploy your HSA funds however you’d like – not just on medical expenses – without incurring a penalty or fee. Just pay standard income taxes on the withdrawal as you would with a traditional IRA. So, if you’re already maxing out your contributions to your 401(k) and IRA accounts, an HSA can allow you to stash away additional funds each year.
Are There Any Downsides to Using an HSA?
There may be certain disadvantages associated with using an HSA. Depending on the financial institution you choose to partner with, some HSAs come with frequent transaction or maintenance fees. Although they tend not to be excessively high, these fees can accumulate and impact the value of your account over time. That said, you may be able to avoid some of these charges by maintaining a minimum balance or meeting other requirements.
HSAs entail record-keeping obligations that may be challenging to manage, including procedures that must be followed for withdrawals and filing requirements for contributions.
Could an HSA Make Sense for You?
Medical costs can rise as you grow older, so beginning to contribute to an HSA early and letting it grow over time may help eligible participants achieve a healthy and comfortable future.
If you’re wondering whether or not an HSA makes sense for you, consider connecting with your financial advisor. to discuss your future healthcare needs. and whether this investment vehicle makes sense within your overall financial profile