In part 1 of this series we went over the basics of what a Health Savings Account is, and how it works. In part 2, we talk about the potential advantages available when we save and invest HSA funds until retirement instead of using HSA funds to pay for current health expenses.
The rise in HSA participation is great news. More people will be saving money to pay for their healthcare expenses while taking advantage of the tax savings built in to these types of accounts. Unfortunately, some may not be utilizing their HSA accounts as wisely as they could be. As we discussed in part 1, HSAs offer three tiered tax advantages: Tax free contributions, tax free withdrawals (for qualified expenses) and tax free investment earnings. The key to maximizing your HSA is to grow the balance in your account now, while you can, and then reap the rewards in your later years.
Remember, the “S” in HSA stands for “SAVINGS.” These accounts are designed for the long run. A good strategy to incorporate might involve the following:
- Max out your HSA contribution each year.
- If you can afford to, don’t use your HSA funds to pay for current medical expenses.*
- Invest your HSA funds in stocks and bonds
The ability for the account balance to grow over time (as a result of consistent contributions coupled with tax free earnings) is the key to maximizing your HSA. Try to avoid running down your funds at the end of each plan year. Save your money but if you have to withdraw, only withdraw when you have a necessary, eligible, health expense.
In part 3 of this series we will discuss how you can benefit from your HSA savings once you have reached retirement age.
*If you find yourself using your HSA funds to pay for current medical expenses, consider enrolling in your companies FSA instead. The “S” in FSA stands for “SPENDING.” These accounts are designed for the short term; and the added benefit is that FSA accounts are prefunded by the employer. This means that FSA participants don’t have to wait for the balance in their accounts to accumulate over the course of the plan year before they can begin to spend their funds.