For Americans of all ages, healthcare costs are an inescapable expense. And if it isn’t a significant expense for you right now, it probably will be in the future. For this reason, funding an HSA, or health savings account, makes sense.
A hybrid savings and investment account is an HSA. You can donate money toward medical costs and withdraw it when necessary. However, you can invest that money while it is in your account for further growth, just like you can put money in a brokerage account.
Now, you might be reluctant to contribute to an HSA because you want the freedom to withdraw funds whenever you want, just like you can with a savings account. But here’s why investing in an HSA makes sense.
1. They have quadruple tax benefits.
You receive a tax credit on your donations if you have a traditional IRA. You can benefit from both tax-free withdrawals and tax-free investment gains if you have a Roth IRA. You do, in fact, receive all of these advantages with an HSA. When used to pay for qualified medical expenditures like pharmaceutical copays, glasses, and dental care, withdrawals from an HSA are also tax-free. Contributions are tax-deductible, as are investment profits.
2. They are adaptable
FSAs (flexible spending accounts) aren’t really that flexible. This is due to the fact that you are required to make an annual contribution up front rather than having the flexibility to change it as necessary. And finally, you run the danger of losing your money if you don’t deplete your FSA balance before the end of your plan year.
HSAs offer much greater flexibility than FSAs. One benefit is that you don’t have to make a single lump sum contribution; instead, you can contribute money consistently throughout the year. Additionally, you are not obligated to exhaust your balance yearly. In fact, leaving at least some of your money invested so that it can increase in value is the greatest approach to make the most of an HSA.
3. Later in life, they can be converted to a conventional retirement account.
You will be charged 20% of the amount you withdraw if you use an HSA for a non-medical withdrawal. However, that penalty is eliminated after you reach the age of 65, regardless of how you use your HSA. As a result, once you turn 65, you can treat an HSA just like any other retirement account. Additionally, while you would be subject to taxes on non-medical withdrawals, these are the same taxes you would incur if you were to withdraw from a regular IRA or 401(k).
Funding an HSA is beneficial.
There is no denying that HSAs are a good idea. It is advantageous to use one if you are qualified to do so.
However, not everyone qualifies to make contributions to an HSA because doing so requires signing up for a high-deductible health insurance plan. There are also further limitations, such as the inability to finance an HSA while receiving Medicare.
If you’re unsure if you qualify for an HSA, check with the administrator of your health insurance plan to determine if your coverage is acceptable. Someone in your benefits department should be able to answer that issue for you as well if you receive insurance through your workplace.