What is a Health Savings Account?
An HSA is a savings account that helps you manage healthcare costs you incur today. You can only utilize an HSA if you have a qualifying high-deductible health insurance plan. You save pre-tax income (For 2021: $3,600 for individuals, $7,200 for families, and additional catch-up amounts if over 55) to help pay for medical bills that your insurance doesn’t cover. This is great and many people utilize it this way to pay for qualified medical expenses (http://www.hsacenter.com/what-is-an-hsa/qualified-medical-expenses). But what if the tax benefit was even greater?
Triple Tax Benefits
A commonly unknown benefit is the HSA is your most tax advantageous investment account, more advantageous than a Roth IRA. In addition to saving pre-tax income, like a Traditional IRA or 401k, you can invest the money and not pay taxes on earnings, like a tax-deferred retirement account. You can also withdraw the money without paying taxes, like a Roth IRA, if the withdrawals are used for qualified expenses. This is an account that has a triple tax benefit!
It doesn’t end there. HSAs do not have a use-it-or-lose-it provision which means you can roll the unused funds to the next year indefinitely. If you can afford to pay expenses out of pocket and not from the HSA, you can save the receipts and reimburse yourself in the future for any past expenses. This transforms your HSA from a healthcare spending account to a long-term investment account. The key is to find an HSA with investment options, such as Further, that allows you to invest in Mutual Funds and not a cash savings account. With a well-constructed investment mix, your HSA savings overtime will help you grow a tax-free bucket.
In short, we have been recommending to many of our clients that they max out their HSA every year. Then pay for medical expenses out of pocket while keeping records of receipts. They invest the HSA with the intentions of not spending from it until many years down the road allowing it to accumulate tax-free.
Are you utilizing your HSA properly? If you have further questions on how to maximize your HSA, feel free to contact us.