Here’s the best way to use a health savings account

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Health savings accounts can be a powerful way to build wealth and prepare for medical expenses in old age – if used properly.

HSAs provide a triple tax benefit. Contributions and increased investments are tax-free, as are withdrawals if used for specific health expenses.

Even if a withdrawal is not health-related, the account holder will only owe income tax on these funds – effectively converting the HSA into a tax-benefit account similar to a traditional 401 (k) plan or individual retirement account.

“I almost do not consider them health savings accounts, but deep tax retirement accounts,” said Andy Baxley, a Chicago-based certified financial planner at The Planning Center.

Ideal use

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The ideal way for savers to use HSA is to contribute the annual maximum, invest the money and pay for the current health costs out of their own pocket through other savings, according to financial advisers.

This gives HSA money time to grow tax-free. HSA investments are like any other retirement account, with differentiated equity and bond funds, for example.

However, most people do not invest their savings in HSA. Instead, they use HSAs as a bank account and withdraw cash as required to pay for current medical expenses.

Only 9% of account holders invested a portion of the HSA balance in 2020, according to the Employee Benefits Research Institute. The rest – 91% – kept their full balance in cash.

But that does not offer substantial upward growth – a downside when retirement health costs are expected to be around $ 300,000 for the average couple who retired in 2021, according to an estimate by Fidelity Investments.

The IRS describes a wide variety of eligible HSA health costs, such as those related to dental care, vision, hearing, long-term health insurance premiums (subject to limits), and medications, for example.

HSA compensation

Savers who pay out of pocket now for health costs can benefit from another HSA benefit in the years to come: They can withdraw account funds to pay themselves (tax-free) for these past expenses.

As with Roth 401 (k) or IRA withdrawals, these HSA refunds can provide retirement income and help someone check their tax account.

An HSA is not at all trivial for almost anyone who has access to one.

Carolyn McClanchan

founder and head of financial planning at Life Planning Partners

Suppose you are on the verge of going to a higher level of income tax on retirement, but you have spent $ 10,000 out of pocket all these years on medical bills. You can withdraw this $ 10,000 from your HSA for past costs without increasing your taxable income.

(An important point: Expenses incurred before you set up your HSA are not considered eligible medical expenses.)

“I think so [people] “I often do not realize how extensive the list of things you can be compensated for is,” Baxley said, citing fertility treatment as an example.

It is advisable to create a spreadsheet with non-refundable medical expenses (to know how much you can pay later) and keep receipts for proof.


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Of course, many people do not have the financial means to use HSA in the ideal way.

Individuals live longer and had to take greater individual responsibility for their retirement savings, as companies have changed their pensions to 401 (k) schemes, for example.

Limited cash flow may mean that there are competitive economic priorities: e.g. emergency funds, pension plans and health savings. (Individuals and families can contribute up to $ 3,650 and $ 7,300, respectively, to an HSA this year.) Out-of-pocket payments for current expenses may also not be possible, depending on the individual’s financial situation.

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In addition, only those with high-discount health plans can save money on an HSA. In 2021, 28% of employees covered by employer-funded health insurance enrolled in a high-discount health plan with a savings option such as HSA, according to the Kaiser Family Foundation. (Registrations are slightly higher in large companies with more than 200 employees.)

In addition to reservations, those with access should try to use them as best they can, financial advisers said.

“An HSA is not at all smart for almost anyone who has access to one,” said Carolyn McClanahan, a physician and CFP who is the founder and chief financial officer of Life Planning Partners in Jacksonville, Florida.

A high discount program – and therefore an HSA – may not be the best choice for everyone. For example, someone with a chronic illness that leads to frequent visits to the doctor may have a greater financial benefit from a program with lower annual costs out of pocket.

How to invest

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Like any other investment account, it is imperative that you understand your financial and psychological ability to take risks by investing your HSA funds, McClanahan said.

This means that you can withstand the ups and downs of the stock market and align your strategy with your investment time horizon.

A young saver with the financial means to pay out of pocket for today’s health costs can afford, for example, to take a risk – perhaps in a widely diversified low-cost stock market, McClanahan said.

However, savers who do not have the means to cover their annual deductible or ceiling with other savings should keep at least that amount in cash or something more conservative, such as a money market fund, before investing the rest, McClanahan said. . (Some HSA providers require account holders to keep a certain amount of cash before investing.)

This is especially true for savers who are not healthy and need frequent health care, he added.

Similarly, someone closer to retirement age will likely need to reduce their shareholding to avoid putting money at risk near the age at which they start using their accounts.

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