Are You Making the Most of What Your HSA Has to Offer?
If you have a Health Savings Account (HSA), you know this financial tool allows you to cover the cost of health-related expenses with pre-tax funds. This is a fantastic benefit and one that many people take advantage of to save money in the present. Believe it or not, though, health savings account advantages extend far beyond the short-term. In the article below, we’ll discuss four strategies you can use to make the most of your HSA now and into the future.
First: The Tripe Tax Advantage
You can’t talk about health savings account advantages without mentioning that an HSA offers more than one mode of tax savings—it’s a vehicle that offers triple tax savings. This means you can contribute money pre-tax, withdraw the money tax-free, and pay no taxes on earnings. An HSA offers an even bigger benefit, too: you can withdraw funds now, in a few years, or even during retirement, as long as you’re using them for qualified medical expenses.
How HSAs Work
Now, not everyone is eligible for an HSA, meaning not everyone can use health savings account advantages to strengthen their finances. HSAs are offered at work or in a private marketplace as a part of an eligible high-deductible health plan. They have some similarities with a flexible spending account, but unlike an FSA, in which you have to spend or lose, the funds in an HSA rollover from year to year. They do come with a contribution limit, too. For 2023, it is $7,750 for family coverage and $3,650 for individual coverage. (You may also be able to make a catch-up contribution of up to $1,000 per year if you are 55 years or older.)
Now that we’ve covered the basics, let’s get into four forward-thinking strategies you can utilize to make the most of your health savings account advantages:
#1: Save Ahead for Healthcare Costs
This is one of the more obvious health savings account advantages but, of course, it’s an account that lets you save specifically for medical costs. This is important because so much of the savings we do is focused on retirement, college, or a goal like purchasing a new home. It’s less common to have a focused savings strategy for healthcare costs, but it’s one of the most universal needs we will all spend on. The Fidelity Retiree Health Care Cost Estimate found that an average 65-year-old retired couple may need approximately $315,000 post-tax to cover healthcare expenses in retirement. This certainly can be accumulated in an HSA, but it’s smart to save for your health expenses even if you don’t have one.
#2: Invest Your HSA Contributions
Did you know that most health savings accounts allow you to invest your contributions? It’s true, and this can be a fantastic advantage when you use it properly. Start by setting aside enough money to make the most of your HSA’s original strategy: covering today’s qualified medical expenses. With whatever you have left over, consider investing your unused HSA funds to help you strengthen your retirement strategy. Over a term of 30 years, if you invest the maximum amount into your HSA, you could have more than $320,000! Remember, this growth isn’t only smart—it’s tax-free, and you can’t beat that.
If you don’t feel confident about where to invest, consider working with a financial advisor who can help you find the right mix for your HSA portfolio.
#3: Leverage Your HSA in Retirement
To truly make the most of your health savings account advantages, look beyond its traditional uses. There are many ways you can also use those funds to strengthen your retirement plan:
Let’s say you plan to retire before 65. Your HSA can help you bridge the gap between your previous healthcare coverage and Medicare eligibility. There are only two situations in which this is applicable: paying for COBRA employer-sponsored coverage and paying premiums if you’re receiving unemployment benefits.
While not all premiums are covered, you can use your HSA to cover certain Medicare expenses. This includes Part D and Part D prescription-drug coverage premiums.
Did you know that an estimated 70% of retirees will need long-term care at some point? If you’re looking for a long-term care insurance policy to provide peace of mind, your HSA can be used to cover the cost as long as it’s tax-qualified.
#4: Estate Plan with Your HSA
Did you know that you can typically pass along your HSA assets to your heirs when you pass? Generally, if your spouse is the designated beneficiary, they will take over your HSA. If your spouse isn’t the beneficiary, the account stops being an HSA and the amount becomes taxable for whomever the beneficiary is. On the other hand, if your estate is the beneficiary, the HSA will be included on your final income tax return at fair market value.
Are You Maximizing Your Health Savings Account Advantages?
You may not immediately think of an HSA when it comes to planning for your long-term financial future, but you could reap significant benefits if you’re intentional about your plans. Maximize your health savings account advantages by using the four strategies mentioned above and give yourself more peace of mind for the future.
Would you like professional guidance in creating a personalized financial plan to serve your unique needs? At Davidson Capital Management, we believe in providing a personal perspective on wealth and helping you create a customized plan for your future. Reach out today to schedule a conversation about utilizing health savings account advantages or any other financial planning topics.