The triple tax benefit of a Health Savings Account (HSA) makes it the most tax-advantaged account.
1. Contributions are pre-tax (reducing your taxable income).
2. Money grows tax-free.
3. Withdrawals are tax-free when used for eligible healthcare expenses.
We need every benefit since the average couple is estimated to need $300,000 to cover healthcare expenses in retirement.
7 Ways to Improve Your HSA
1. Maximize Your Contributions
Only 13% of HSA owners contribute the maximum to their HSA each year. Be one of those!
2. Add Catch-Up Contributions
If you’re 55 or older at the end of the year, you can contribute an additional $1,000 each year.
3. Allow Tax-Free Growth
Most people contribute to their HSA each year and then spend those funds on current healthcare costs. To benefit from the triple tax advantage, consider your HSA as an investment account for retirement rather than as a healthcare expense account. To take advantage of tax-free growth, consider paying for current healthcare expenses from your salary and let the funds in your HSA grow. Under current IRS rules, you are not required to reimburse yourself from your HSA in the same year you incur a medical expense. You should carefully track healthcare expenses and receipts so you can reimburse yourself in the future.
4. Invest your HSA
Most HSAs let you purchase investments that have potential for greater growth. Particularly if you plan to let your account grow, consider whether investing your HSA funds will better help you meet your goals. You should consider market fluctuations when planning investments in your HSA.
5. Recognize your HSA as a Powerful Retirement Account
If you are fortunate enough to have more money in your HSA than you need to cover healthcare expenses after retirement, think of your HSA as an improved 401(k). After age 65, an HSA withdrawal for non-medical expenses has no penalty and is taxed like a normal distribution from a 401(k) or Traditional IRA. Since HSAs have no requirement to begin withdrawing money, you can keep the money in your account until you need it.
6. Use Allowed Expenses
Qualified healthcare expenses that are often overlooked include over-the-counter medication, chiropractic, prescription drugs, orthodontic, vision (exams, glasses, contacts), dental, and in-home nursing. After age 65, you can also include many Medicare premiums as qualified expenses. (Qualified medical and dental expenses change periodically so review IRS Publication 502 for current details.)
7. Your HSA Stays with you
Unlike an FSA, your HSA is not tied to your employer so you keep it when you change employment or retire. Additionally, any unused balance at the end of the year stays in your account so you can let it grow.
Tax rules could change in the future so please review IRS Publication 969 (Health Savings Accounts and Other Tax-Favored Health Plans) and other reputable sources for more details on how to manage your HSA.