Maximizing your Health Savings Account
Tax savings? Investment returns? Heck, yeah.
A Health Savings Account, or HSA, is a great adjunct to a high-deductible health plan. If you can afford to put extra money into it, you should, because it’s a sneaky way to increase your retirement savings and offset the risk of long-term care late in life.
Under federal law, anyone who is covered by a high-deductible health plan (one with a deductible of at least $1,400 for an individual or $2,800 for a family) who is not enrolled in Medicare or other health insurance plan can contribute to an HSA. For 2023, you can contribute up to $3,850 as an individual and up to $7,750 as a family. If you’re over 55, you can contribute an additional $1000.
Unlike some other types of health care accounts, such as Flexible Spending Accounts, you do not have to spend the money in your HSA. You can roll the amount over until you need it or until you retire, when you are free to spend it on any purpose. (There is a catch: if you spend it on a non-medical expense in retirement, you will be pay taxes as if it were regular income.)
Here’s a quick summary of HSA benefits:
Taxes: HSA contributions are deductible from current taxable income, and any interest or investment gains earned within the HSA are tax-free. When funds are withdrawn to pay for qualified medical expenses, those withdrawals are also tax-free. If you withdraw money for non-medical expenses, you’ll pay regular income tax; if you’re younger than 65, you’ll also pay a 20% penalty tax.
Portability: When you leave your employer, you can roll the HSA over into another HSA. I’m a fan of Lively, which doesn’t have a fee. If you’re eligible for an HSA but your employer doesn’t offer one, or if you’re self-employed, you can use Lively, too. (They don’t pay me, and that’s not an affiliate link; I just have a good experience to share.)
Long-term care: You probably can’t contribute to an HSA once you’re retired because you’ll be getting Medicare, but you can keep the money in the account and get investment gains from it. Then, you can use it to help pay for long-term care or qualified expenses that help you stay in your home longer. Given that there are problems with long-term care insurance, using your HAS may give you many of the benefits with less risk.
I often forget about my HSA because I’m generally healthy (and furiously knocking wood right now). But I shouldn’t, because it’s a good deal! And if you aren’t taking advantage of the benefits, consider this your reminder to do so, to the extent that you can afford to.