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Rising medical expenses and recent stock and bond market volatility could make Americans consider investing in health savings accounts, especially as the open enrollment season begins. HSAs, in which people with high-deductible insurance plans save on qualified medical expenses, have one thing that no other investment has: a triple tax credit. Contributions are not taxed; investment growth, interest and dividends are tax-deductible, and there are no fees on withdrawals due to qualified medical expenses. However, to get the most out of these tax savings, you will need to put some of the money into long-term investments so that they can grow tax-free and ideally be used in retirement. The money in your account rolls over from year to year, unlike accounts with flexible spending. You may also be compensated years later for qualifying expenses incurred now, as long as you keep receipts. “This is another retirement bucket,” said certified financial planner Candice Lee, vice president of Glassman Wealth Services in Vienna, Virginia. However, she suggests maximizing your retirement accounts like 401(k) first before maximizing HSA. You can contribute up to $3,650 for individual insurance and up to $7,300 for family insurance in the 2022 HSA. Next year, that maximum will increase to $3,850 for an individual health plan and $7,750 for a family plan. It is helpful to have some money for future medical expenses, as they are likely to be higher as you get older. A 65-year-old couple retiring this year can expect to spend an average of $135,000 on medical expenses after retirement, not including long-term care, according to Fidelity Investments. This is 5% higher than last year’s estimate. However, it’s not just older people who suffer from high medical bills. Overall health care spending has also risen, accounting for 20% of the total U.S. gross domestic product in 2020, up from 5% in 1960. costs that you cannot cover with your income. A good rule of thumb is to set aside your deductible amount in cash or fixed income, Carolyn McClanahan, founder and director of financial planning at Life Planning Partners in Jacksonville, Florida, told CFP. According to the Kaiser Family Foundation, the average total annual deductible for an HSA compliant high deductible health plan in 2021 was $2,454 for a single coverage. “You have to make sure you have the ability to soak it up [deductible] If some catastrophic event happens to you,” she said. Most Americans avoid investing any stocks or bonds in their HSAs, meaning they are potentially losing out on the long-term growth of tax-advantaged investments. Only 9% of HSA accounts made investments. According to the Morningstar Health Savings Accounts 2022 report, provider choices. However, investment account assets account for more than 36% of total assets, according to the report. Selecting an HSAYou can participate in your employer’s HSA, if one is offered.Some Companies By According to the Kaiser Family Foundation, workers enrolled in high-deductible HSA plans receive, on average, an annual employer contribution to their HSA of $575 for individual insurance and $987 for family insurance. You can also open an individual account through a vendor. Morningstar is ranked in the top 10 HSA vendors for two uses: as a spending account for current expenses and as an investment account for savings for the future. Loyalty came first for both. Fidelity’s 1.19% interest rate on expense accounts is the highest offered. It also has no maintenance or other additional fees. When it comes to investment accounts, providers must offer compact yet diverse investment lines of high-quality strategies at the lowest possible prices, whether active or passive, writes Tom Nations, Morningstar’s associate director of multi-asset and alternative assets. strategies. In determining its ranking, Morningstar evaluated the HSA’s menu design, investment quality, total cost to the investor, and investment threshold, the amount of money that must be kept in an account before dollars can be invested. Five out of 10 providers offer account-linked brokerage windows, so users can invest in whatever is available on the brokerage platform, Nations noted. These are Fidelity, First American Bank, HSA Bank, Lively and Optum. All 10 offer investment menus. If your employer offers an HSA, you can compare costs and investment options with individual plans. You can stick to your employer’s plan for your contributions or open a separate account. The easiest way to do this from a tax standpoint is to fund your employer account with payroll deductions, if possible, and then transfer it to your individual account, CNBC told the Nation. “You can transfer the balance fairly regularly without any tax implications,” he said. However, depending on the provider, you may have a transfer fee. Deciding How to Invest How you use the HSA will determine your overall investment strategy. Morningstar outlined three different approaches in its report. The first bucket-based approach involves dividing assets into three need-based buckets that can separate HSA spending money from long-term investment assets. Short-term money goes into very conservative cash, money markets, and short-term bonds. Money that will not be needed for another 7-10 years is directed to quality bonds. Anything you save for over a decade can be invested in stocks. According to the Nation, risk-targeted balanced strategies like the Vanguard LifeStrategy series are a versatile alternative if you don’t want to manage multiple funds. They are good for medium to long term money, which means you may need to reallocate money to urgent needs. However, strategy managers are rebalancing. Finally, if you can afford to pay your expenses out of your own pocket without diving into the HSA, you can invest for the long term. However, Nations does not suggest treating this like your 401(k) or IRA. While you can use your retirement plan as a template for an HSA, consider lowering your equity risk in case you need money. “Don’t be a forced seller. Avoid using HSA balances during market downturns because it drains reserves and principal, which can increase when markets recover and in the long run,” Nations wrote. On the other hand, if you know for sure that you won’t need to use HSA until you retire, Carolyn McClanahan suggests being more aggressive with your retirement plans. “Too many people make their investments mirror each other. This is unreasonable from a tax standpoint,” she said. Both Roth IRAs and HSAs can grow “forever tax-free” so they should be the last thing you touch. When it comes to what to invest in, McClanahan advises keeping it simple and consistent with your overall investment policy. “Don’t get carried away with your HSAs. Use low-cost index funds,” she said. Also keep in mind that once you turn 65, you can withdraw money for non-qualifying medical expenses and be taxed just like your 401(k) or IRA. “They don’t have a penalty for excessive savings,” Nations said.
Credit: www.cnbc.com /