Here’s the best way to use a health savings account, which offers a triple-tax advantage

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  • Health savings accounts have three-way tax benefits: tax-free contributions, earnings and withdrawals. They are available to people with high-deductible health plans.
  • According to financial advisors, HSAs can be a powerful way to build wealth and save on medical costs in old age.
  • As far as possible, savers should invest their HSA funds and pay for current health costs out-of-pocket. They can keep receipts and reimburse themselves later.

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

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HSAs have three-dimensional tax benefits. Contributions and investment growth are tax-free, as are those used for withdrawals. qualified health expenses,

Even if the withdrawals aren’t health-related, the account owner only has to pay income tax on those funds — converting the HSA to an account with tax benefits similar to a traditional 401(k) plan or individual retirement account.

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“I don’t almost think of them as health savings accounts, but deeply tax-advantaged retirement accounts,” said Andy Baxley, a Chicago-based certified financial planner at The Planning Center.

ideal use

According to financial advisors, the ideal way for savers to use an HSA is to contribute the annual maximum, invest the money, and pay for current health costs through other savings.

This gives HSA money time to grow tax-free. For example, HSA investments with diversified stock and bond mutual funds are like any other retirement account.

However, most people don’t invest their HSA savings. Instead they use an HSA like a bank account and withdraw cash as needed to pay current medical costs.

According to the Employee Benefit Research Institute, only 9% of account holders were investing a portion of their HSA balance in 2020. The remainder – 91% – kept their entire balance in cash.

But it offers virtually no upside growth — a disadvantage when health costs in retirement are expected to be around $300,000 for the average couple retiring in 2021, according to a Fidelity Investments report. assessment,

their’s framework For example, a wide variety of eligible HSA health costs associated with dental care, vision, hearing, long-term care insurance premiums (subject to limits) and medications.

HSA reimbursement

Savers who pay for health costs out of their own pocket now can take advantage of another HSA benefit in future years: They can fund the account to pay themselves back (tax-free) for those earlier expenses. can remove.

As with withdrawals from a Roth 401(k) or IRA, these HSAs can offer reimbursement retirement income and help someone control their tax bill.

An HSA is a no-brainer for almost everyone who has access to one.
Carolyn McClanahan
Founder and Head of Financial Planning at Life Planning Partners

Let’s say you’re on the verge of jumping into a higher income tax bracket in retirement, but have spent $10,000 out of your own pocket over the years on medical bills. You can withdraw that $10,000 from your HSA for past costs without increasing your taxable income.

(One important point: Expenses incurred before setting up your HSA not considered Qualified medical costs.)

“I feel [people] Often you don’t realize how extensive the list of things you can be reimbursed for,” Baxley said, fertility treatment For example.

He recommends making a spreadsheet of unreimbursed medical expenses (to know how much you might pay yourself later) and keeping receipts for proof.


Of course, many people don’t have the financial means to use an HSA in an ideal way.

Individuals tend to live longer and have to bear more personal responsibility for their retirement savings, as companies have switched pensions to 401(k) plans, for example.

Limited cash flow can mean having competing financial priorities: emergency funds, retirement planning and health savings, for example. (Individuals and families can contribute up to $3,650 and $7,300 to an HSA this year, respectively.) Depending on an individual’s financial situation, it may not even be possible to pay out-of-pocket for current costs.

More from Personal Finance:
Why 2022 has been a dangerous time to retire
You Can’t Put Money in an HSA After You’re on Medicare
IRS Raises HSA Contribution Limit for 2023

In addition, only those with a high-deductible health plan can save in an HSA. In 2021, 28% of workers covered by employer-sponsored health insurance were enrolled in a high-deductible health plan with a savings option such as an HSA. according For the Kaiser Family Foundation. (Enrolment is slightly higher in larger firms with more than 200 employees.)

Caveat aside, those with access should try to use them in the best possible way, said financial advisors.

According to Carolyn McClanahan, MD, a medical doctor and CFP, founder and head of financial planning at Life Planning Partners in Jacksonville, Florida, “an HSA is a no-brainer for almost everyone who has access to one.”

A high-deductible plan — and, by extension, an HSA — may not be the best option for everyone. For example, a person with a chronic illness that requires frequent visits to the doctor can get a huge financial benefit from a plan with a low annual out-of-pocket cost.

how to invest

Like any other investment account, it’s imperative to understand your financial and psychological ability to take risk by investing your HSA funds, McClanahan said.

This means being able to withstand the ups and downs in the stock market, and aligning your strategy with your investment time horizon.

McClanahan said a young saver with the financial means to pay out-of-pocket for current health costs could take a risk, for example — perhaps in a low-cost widely diversified stock fund.

However, savers who don’t have the means to cover their annual deductible or out-of-pocket with other savings should at least keep this amount in cash or invest some other conservative such as money-market funds. , McClanahan said. (Some HSA providers require account holders to hold a certain amount in cash before investing.)

This is especially the case with savers who are not healthy and require frequent health care, he said.

Similarly, someone nearing retirement age should reduce their stock allocation to avoid putting riskier money closer to the age at which they will begin tapping their accounts.

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