When it comes to choosing a health plan during open enrollment season, there are many factors to consider. Premiums, deductibles, and provider networks all play a role in determining the best fit for your needs. However, financial advisors are urging Americans to also take into account one crucial financial tool: a health savings account (HSA).
An HSA is available to those who enroll in a high-deductible health plan offered by their employer. Unlike flexible spending accounts (FSAs), HSAs do not have a “use it or lose it” provision. The funds in an HSA are owned by the account holder and can be carried over from year to year or even taken with you if you change jobs.
While most people keep their HSA money in cash, recent surveys show that using these funds to invest can provide unique advantages as a retirement savings tool. Contributions to an HSA are tax-deductible, the growth of the funds is tax-free, and qualified medical expenses can be withdrawn tax-free as well. This triple tax advantage makes HSAs a powerful yet underutilized financial tool, according to certified financial planner Sean Lovison.
To take full advantage of an HSA, consider the following steps:
1. Contribute as much as you can: In 2023, individuals can contribute up to $3,850, while those with family coverage can contribute up to $7,750. Maximizing your contributions will maximize the potential for long-term compounding growth.
2. Invest wisely: Treat your HSA like a brokerage account and invest in mutual funds or exchange-traded funds. This allows your investments to grow tax-free within the account.
3. Keep cash on hand: Maintain enough cash in your HSA to cover your annual deductible. Invest any remaining funds to maximize growth potential.
Utilizing an HSA as a retirement savings vehicle requires the ability to pay for healthcare expenses out of pocket in the short-term. However, the long-term benefits of compounding growth and the certainty of future health care expenses make it a viable strategy for those with low healthcare costs and sufficient cash reserves.
It’s important to note that an HSA may not be the right choice for everyone. Factors such as expected medical expenses, budget constraints, and psychological comfort with out-of-pocket payments should be taken into consideration. Choose the best-fit health insurance plan for your specific situation and consult with a financial advisor to determine if an HSA is the right option for you.
FAQ
What is an HSA?
An HSA, or health savings account, is a financial tool available to individuals enrolled in high-deductible health plans. It allows for tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
How does an HSA differ from an FSA?
Unlike flexible spending accounts (FSAs), HSAs do not have a “use it or lose it” provision. The funds in an HSA can be carried over from year to year and are owned by the account holder.
How can I maximize the benefits of an HSA?
To maximize the benefits of an HSA, contribute as much as you can, invest wisely, and keep enough cash on hand to cover your annual deductible. This will allow your HSA to grow and provide for future medical expenses.
Is an HSA right for everyone?
An HSA may not be the right choice for everyone. Factors such as expected medical expenses, budget constraints, and psychological comfort with out-of-pocket payments should be considered when determining if an HSA is the best option for you. It’s important to choose the health insurance plan that fits your specific needs.