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How to Use Your HSA as a Bonus Retirement Account

December 27, 2023
A health savings account can be a powerful financial tool. Here's how to use HSA to save on medical costs, manage healthcare expenses, and invest for the future.
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Britt & Laurie Anne
Two female investors in their 30s with a collective net wealth of over $6 million+
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Health Savings Accounts (HSAs) can be a powerful financial tool that not only ease the burden of healthcare expenses but also offer multiple financial advantages, including significant tax benefits and the potential to multiply your money. 

To unlock the full potential of these accounts and secure your financial health, it's crucial to understand how to use your HSA. 

Today, I'm going to dive into how you can use an HSA account as a key element of your financial plan, helping you make informed decisions and achieve financial peace of mind.

What is an HSA account?

A Health Savings Account (HSA) is a tax-advantaged savings account that individuals with high-deductible health insurance plans can use to save money for qualified medical expenses. HSAs are designed to help people set aside funds for healthcare costs while enjoying certain tax benefits.

Advantages of HSAs

Let’s look at some of the advantages of having HSAs:

1. Tax Benefits

Contributions to an HSA are tax-deductible, which means you can reduce your taxable income by the amount you contribute.

In addition, earnings on investments within the HSA grow tax-free, meaning that you don’t have to pay any taxes on the money as long as it remains in the account – no income tax, no capital gains tax, nothing.

Also, the money you take from your HSA to pay for or be reimbursed for qualified medical expenses is tax free. 

2. Savings on Healthcare Expenses

High deductible health plans, which are a requirement for having an HSA, often have lower premiums than traditional health insurance plans, allowing you to save on monthly insurance costs.

Plus, unlike Flexible Spending Accounts (FSAs), HSA funds roll over from year to year. There's no deadline to use the money, allowing you to accumulate savings over time.

3. Investment Opportunities

Some HSA providers offer the option to invest your HSA funds in mutual funds, stocks, bonds, or other investment vehicles. This can potentially help your savings grow over the long term.

4. Portability

Your HSA is yours to keep, even if you change jobs or health insurance plans. It is not tied to your employer, providing continuity in your healthcare savings.

5. Retirement Savings

If you take money before you’re 65 from your HSA for non-medical costs, or medical costs that don’t qualify, you’ll have to pay the federal income tax and a 20% tax penalty.

But if you use HSA funds for non-medical expenses after age 65, the withdrawal is treated as regular income for tax purposes. This means your HSA can serve as a supplemental retirement account.

6. Emergency Fund for Medical Expenses

Having an HSA can act as a financial safety net, allowing you to cover unexpected medical costs without going into debt.

7. Employer Contributions

Some employers contribute to their employees' HSAs as part of their benefits package, increasing the amount you can save without impacting your take-home pay.

8. Flexibility and Choice

You have the flexibility to use your HSA funds for a wide range of medical expenses, providing choice and control over your healthcare decisions and how your healthcare dollars are spent.

Who can open an HSA account?

Health Savings Accounts (HSAs) are available to individuals who meet specific eligibility criteria. To have an HSA, you must satisfy the following requirements:

  1. Be enrolled in a High-Deductible Health Plan, which is a health insurance plan with a higher deductible and lower premiums compared to traditional health insurance plans.

  1. Have no health coverage other than a High-Deductible Health Plan. However, there are exceptions for certain types of coverage, such as dental, vision, accident, or disability insurance.

  1. Not Enrolled in Medicare

  1. Not a Dependent on Someone Else's Tax Return

How to Use your HSA

1. Contribute Regularly and Maximize Your Contributions

The IRS sets annual contribution limits for HSAs, which can change each year, so make sure to check the current limits.

To make the most of your HSA, contribute the maximum allowable amount each year. 

In addition to the annual limit, individuals over the age of 55 can make additional "catch-up" contributions.

It's important to note that HSAs are individual accounts, which means that each eligible individual can have their own HSA. If you are married and both you and your spouse have family coverage under a high deductible health plan, you can each have your own HSA and contribute to them separately, up to the annual contribution limits.

2. Use it for Qualified Medical Expenses

Use your HSA funds for eligible medical expenses such as doctor's visits, prescription medications, dental and vision care, and certain medical equipment. 

3. Save Receipts and Keep Records

Keep receipts for qualified medical expenses. You can reimburse yourself from your HSA at any time, even years later, as long as you have the documentation.

In addition, maintain accurate records of your HSA contributions, withdrawals, and expenses. This documentation will be crucial when filing taxes or in case of an IRS audit.

4. Invest Your HSA Funds

Some HSA providers allow you to invest your HSA funds in mutual funds, stocks, bonds, or other investments, potentially allowing your savings to grow over time. This is a good strategy if you don't need to use your HSA for immediate medical expenses.

5. Save for Retirement

After age 65, you can withdraw HSA funds for non-medical expenses without penalties (though regular income tax applies). This can make your HSA a supplementary retirement savings account.

6. Save for Future Health Expenses

Keep your HSA funds available for future medical expenses, especially if you anticipate significant healthcare costs down the road. 

7. Understand Tax Benefits

Contributions to your HSA are tax-deductible, reducing your taxable income. Earnings on your HSA investments are tax-free, and withdrawals for qualified medical expenses are also tax-free.

8. Shop Smart for Healthcare

Use your HSA as an incentive to shop for cost-effective healthcare services and negotiate prices when possible.

9. Learn the Rules

Familiarize yourself with the rules and regulations surrounding HSAs to ensure compliance with IRS guidelines and avoid penalties.

10. Plan for Retirement Healthcare Costs

Consider how your HSA can help cover healthcare costs in retirement. As healthcare expenses tend to increase with age, having an HSA can be a valuable asset.

HSAs can be valuable tools for managing healthcare expenses, saving for medical costs, and potentially investing for the future. I hope that this gave you some insight on how you can make it work for you!

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