You might already be using your HSA for healthcare expenses, but have you thought about using it for your retirement plan too?
Most people know an HSA as a Health Savings Account—a place to stash money for future healthcare costs. It can cover everything from doctor’s visits and prescriptions to everyday essentials like contact lens solution.
But if you’re not using it as an investment tool, you could be missing out. In this post, I’ll show you how to get more out of your HSA for both your health and your future.
What is an HSA?
An HSA, or a Health Savings Account, is an account where you can put a portion of your pay before taxes to cover different health expenses. What qualifies as a healthcare expense is pre-determined but covers a wide range like doctor’s visits, prescriptions, and even everyday items like a contact lens solution.
Now you may be thinking ‘Isn’t this just like an FSA (Flexible Savings Account)?’
While they share similarities, a key difference is that an HSA can also be an investment tool.
Why consider an HSA?
If you don’t need to use your HSA funds immediately for medical expenses, you can invest them in funds—much like a 401(k)—and grow your savings tax-free (a detailed guide to come in a future post!).
This may sound irrelevant to you now, but with average yearly healthcare costs over $50k for US seniors, an investment account that can grow will be extremely useful during retirement years.
So what makes an HSA so effective as an investment tool and why should you consider it?
1) Employer Match: Some employers match your HSA contributions up to a certain amount. This is essentially free money! For instance, my employer matches up to $1,200 annually. If I contribute that amount, my company will add $1,200 to my HSA.
2) Flexibility: Unlike some other health accounts, HSAs don’t have a “use it or lose it” policy. You can roll over funds year after year. Plus, you don’t have to use your HSA debit card for every purchase. You can pay with another method, submit receipts, and get reimbursed later.
3) Lower Taxes: Contributions to an HSA lower your taxable income, similar to a 401(k). For example, if you contribute $4,000 annually to your HSA, your taxable income is reduced by that amount—resulting in lower taxes.
4) Tax-Free Growth: The funds in your HSA grow tax-free. When you invest your HSA money, it earns interest or investment returns without being taxed, as long as you use it for qualified medical expenses.
5) Tax-Free Withdrawal: Lastly, you can withdraw the money tax-free as long as it’s used for qualified medical expenses. This means you’re saving on taxes at every stage—when you contribute, invest, and spend.
Next Steps
If you think an HSA could be a good fit, here’s what to do next:
Check Eligibility: Review your benefits or ask HR if you qualify for an HSA and if your company offers matching contributions.
Open an HSA: Start contributing an amount you’re comfortable with—consider at least $1,000 or whatever your company will match.
Consider Investing: If possible, invest half of your contributions in an index fund and keep the rest in cash for any upcoming medical expenses.
Remember, HSAs are available only if you have a high-deductible health plan (HDHP), which many young adults do. For 2024, the maximum contribution limits are $4,150 for individuals and $8,300 for families.
If you have frequent medical needs (chronic conditions, prescriptions, pregnancy-related visits, etc.), an FSA might be more suitable.
Final Thoughts
An HSA isn’t just another savings account—it’s a versatile tool that offers tax benefits, investment opportunities, and long-term flexibility. If you’re enrolled in an HDHP, it’s worth considering whether an HSA could help you manage your healthcare costs and build wealth at the same time.
