Health savings accounts, or HSAs, have unique tax benefits.
For savers, choosing how to best allocate money among a variety of account types may seem an impossible task. There are 401(k) plans, individual retirement accounts, 529 plans, high-yield savings accounts, and many more choices.
HSAs offer a unique “triple tax advantage”. Specifically, contributions are tax-free, investment growth is tax-deferred, and withdrawals are tax-free if used for eligible medical costs.
Because health-care costs are “inevitable” in old age, the HSA functions like an additional retirement strategy and pool of money that many will utilize. Unlike Long Term Care insurance, this is not a “use it or lose it” situation. An HSA can be used as a traditional IRA for additional income in retirement or passed on to heirs. Traditional Long Term Care Insurance (new versions have death benefits) cannot be left to heirs or used other than for long term care expenses.
HSAs have other advantages, too. For example, savers can invest some or all their balance. The accounts are also portable, meaning savers can take their money with them if they leave an employer.
The IRS counts qualified medical expenses as those generally eligible for the medical and dental expenses tax deduction. Those expenses are listed in IRS Publication 502. The list is relatively expansive.
Individuals can contribute up to $3,850 and families up to $7,750 in 2023.
Many people use their HSA contributions for current medical expenses because those contributions are pretax money, so you effectively save your tax rate on the transaction. I would suggest that while this is certainly better than paying taxes first and then paying medical expenses there is, perhaps, a smarter idea - saving the HSA contributions, investing them in mutual funds and growing them until retirement. In retirement, most folks have a lower level of income. The triple tax-free benefit of using the HSA for medical expenses could have a larger impact on a person’s financial future than saving 30% or so during working years.
My wife and I put the maximum amount in our HSA and do so with monthly contributions. It may be a good alternative for you. Contact me if you would like to explore HAS’s as part of your financial plan.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.