HSAs are like onions; they have layers (cue the Eddie Murphy voice). And the better you understand them, the more wonderfully appealing HSAs become. These four simple pointers will help you fully appreciate HSAs’ benefits and empower you to fully utilize your HSA.
- 1. Understand the tax advantages
Benjamin Franklin said only two things were certain in life: death and taxes. Obviously, he must not have had an HSA. Not only are HSA contributions tax-free or tax-deductible at the federal level (and the state level in almost every state), HSA withdrawals for qualified medical expenses are tax-free too. You read that right, HSA funds aren’t taxed going in or coming out, meaning more of your hard-earned dollars go into your pocket, not Uncle Sam’s.
In addition, if you contribute to your HSA via Section 125 payroll withholding through your employer, you save on FICA taxes too (that’s an extra 7.65% back in your pocket). No other savings account can match this array of tax breaks, making HSAs the unquestioned best way to pay for healthcare costs.
- 2. Become a more mindful healthcare consumer
HSAs aren’t available to just anyone; you must be covered by a qualified consumer driven health plan (CDHP) and meet a few eligibility requirements to open an account. And like their names suggest, qualified CDHPs must meet an annual minimum deductible that the IRS sets annually and can’t pay for any non-preventive care before that deductible is reached.
If you have an HSA, this means you’re responsible to pay the total expense of all your pre-deductible medical care, rather than having copays or coinsurance share the cost. By comparing prices and shopping for medical care, you can slash prices for healthcare costs and keep more of your HSA funds in your account. This handy price-shopping guide can get you started on owning your health and becoming a more mindful healthcare consumer. It might take a little more effort than you’re used to at first, but you’ll be glad you did when you realize how much you’ve kept in your HSA.
- 3. Start saving for the future
Often, HSAs can be confused with FSAs, which typically have use-it-or-lose-it restrictions that prevent you from rolling money over to following years. But with HSAs, any funds you or your employer contribute are yours to keep; the funds can stay in your account as long as you want. Also, you can change your contribution level as often as your employer allows, so you don’t have to project your medical expenses for the year like with an FSA. And finally, your HSA is portable, which means that the funds stay with you when you change jobs or retire.
These factors mean that saving your HSA funds for future medical expenses is simple and easy. Unless you’re unbelievably fortunate, you can count on incurring healthcare costs in the future, so there’s no reason not to keep unused HSA funds in your account to cover them. And, you can invest HSA funds the same way you can with a 401(k) or IRA, and those funds’ growth is tax-free as well. If you can afford it, using your HSA to build funds for future medical expenses is a wonderful idea!
- 4. Make HSAs part of your retirement planning strategy
$387,000. According to a recent Healthview study, that’s the amount of money the average couple retiring in 2018 at age 65 should expect to pay in out-of-pocket medical expenses. Medicare doesn’t cover those costs, so you’re responsible to pay for them yourself. You could pay for that $387,000 out of your 401(k), of course, but you’d end up spending up to $129,000 more once taxes are factored in. That’s not a promising retirement strategy.
HSAs are your answer. By investing your HSA funds over time and creating a medical nest egg, you can pay for retirement medical expenses tax-free and save your 401(k) for other things. And, if you happen to have HSA funds left over in retirement, you can use them for non-medical costs after age 65 and only pay regular income taxes like with a 401(k). Rather than only spending your HSA funds on current costs, you can help create a financially secure retirement by integrating your HSA into your comprehensive retirement strategy.
HSAs give consumers ultimate freedom over their funds; they can be used for current medical expenses or invested for healthcare costs in retirement. Either way, HSAs offer matchless tax benefits to ensure as much of your money as possible goes into your pocket. If you’re HSA-eligible, opening an account is one of the wisest financial moves you can do; you’ll reap the benefits throughout your life.
If you’d like to learn more about HSAs, this detailed 18-page guide will walk you through everything you need to know. Or, if you’re ready to sign up for an account, you can enroll effortlessly here.