If you have access to a Health Savings Account (HSA), I have some great news: your HSA is, hands down, the king of all savings accounts, offering benefits that aren’t all available through other savings vehicles. Think triple tax benefits, complete portability, and investment options that can transform it from a basic healthcare fund into powerful fuel for your retirement income. If that sounds overly bold—or you simply can’t imagine that anything can top your trusty 401(k) plan—read on!
It’s pretty rare that a savings tool becomes available that has the power to make a new and dramatic impact on your retirement income, but the HSA is exactly that. Like the older and more commonly used Flexible Spending Account (FSA), an HSA is used to pay for qualified healthcare expenses in the current year. But unlike an FSA, your HSA is not a “use it or lose it” account and does not expire at the end of the plan year. That makes it an excellent vehicle for saving for future healthcare expenses on a tax-favored basis. And because healthcare expenses are very likely to rise as you age, it’s quite literally ‘money in the bank’ to cover higher healthcare costs during retirement.
Plus, while most retirement savings plans offer a double tax benefit, the HSA goes one step further to triple your tax benefits. With traditional vehicles, you either pay taxes up front and then grow your assets and benefit from tax-free withdrawals in retirement, or use pre-tax dollars, grow your assets tax-deferred, and then pay taxes when you withdraw the money. Using an HSA, you can contribute to your account with pre-tax dollars, and grow your assets tax-free, and make tax-free withdrawals (as long as they are used for qualified medical expenses). It’s the only completely tax-free savings vehicles I know of, which makes it a fantastic choice if you can get it.
Here are some other benefits that, in my mind, work together to make the HSA the king of all accounts:
Of course, anything that sounds almost too good to be true is bound to have some caveats. If you use HSA funds for non-medical expenses prior to age 65, you will be taxed on the distributions and hit with a hefty 20% penalty. It’s also important to understand that because all HSAs are high-deductible plans, you’ll need to pay out-of-pocket for medical expenses until the deductible is met. That means you’ll need to have that cash on hand to cover your expenses until then. If you use prescription drugs, be aware that some plans require you to pay the pre-plan cost of your medications until your deductible is met. I have one client who calculated (and budgeted) her prescription costs based on the standard co-pay amount of $30/month. Once the high-deductible plan kicked in, her out-of-pocket cost jumped to $90/month for a single medication. The same can be true for doctors visit co-pays and other basic costs that are often negotiated down when using a lower-deductible, higher-cost plan.
Health Savings Accounts aren’t for everyone. If you anticipate high medical expenses, a healthcare plan with a lower deductible and out-of-pocket max may be most appropriate. If you don’t—and you want to take advantage of triple tax benefits while saving for your future—you really can’t do much better than an HSA account. With open enrollment just around the corner, now is the time to talk to your advisor to see if this king of savings accounts is right for you.
WANT TO RECEIVE UPDATES TO YOUR INBOX?
Sign up for our newsletter