Aaaah, the humble Health Savings Account (HSA). Most of us have one and know the basics of how to use it, but few harness the HSA to its full potential.
We’ve got you covered. We asked our good friend, Kelley Long, CPA/PFS and an expert on HSAs, to bring us up to speed. She shared three of the most important things to know about this underleveraged financial tool.
But first, what is an HSA? And why should you care?
Given the rising costs of healthcare, it comes as no surprise that HSAs have become an essential part of retirement plans for millions of Americans. A recent study suggests that over 60 million individuals have access to an HSA. And while these accounts are naturally more popular amongst older investors, nearly 20% of Americans in their 30s reported having made at least a contribution to their HSA.
An HSA is designed to provide tax-free savings for out-of-pocket medical expenses, but its super powers go far beyond that. Assuming you are able to pay most healthcare costs with non-HSA money, you can allow your account to accumulate over the years and provide additional peace of mind regarding future expenses, particularly in retirement.
HSAs differ from traditional healthcare accounts in many ways. For example, unlike Flex Spending Accounts (FSAs), your money will always remain accessible to you, whether or not you are continuing to contribute and even after you’ve switched jobs, healthcare plans, or have retired. Here are three other things that might surprise you to learn about HSAs:
1. HSAs Offer Several Tax Benefits
Understanding the tax implications of an HSA offers vital insight into why they are so essential for your long-term plans. HSAs are designed to peak in value when you are most likely to need access to them. There are three important points to consider regarding the tax benefits of your HSA:
Contributions to your HSA are tax deductible. This creates a situation where you can begin funding your account well before retirement and still get a little break on your taxes each year. The earlier you begin saving, the better.
Federal income tax does not apply when you spend from your HSA. As long as you can display that your money is being used on eligible medical expenses, you won’t pay a cent in Federal income tax or state income tax (in most states).
If you invest your HSA, your gains will not be taxed when used for medical expenses. Many people choose to invest their HSA in order to maximize their chances of long-term growth. While this is optional, it can be a great way to set yourself up for growth. Any income earned in your HSA is entirely tax free, which of course, makes them a fantastic way to continue building long-term wealth.
2. There’s No Time Limit On When You Can Reimburse Yourself With an HSA
Here’s a biggie: If you paid out-of-pocket for a past medical procedure, you can still reimburse yourself years later so long as the expense was incurred after your HSA was established.
HSA reimbursement deadlines don’t exist. So, let’s say back in 2015 you had a minor surgery and were in a financial position that allowed you to pay the bill without dipping into your HSA. Flash forward to today. Your HVAC system goes out and with rising inflation rates, money is tighter than usual. Go back to your records, identify the amount of your 2015 surgery, and withdraw that amount, tax-free, from your HSA as a reimbursement for your long-ago surgery. Bingo. Now you’ve got the cashflow to finance your much needed home repair project.
The beauty? You don’t even have to submit anything to do this, but you do have to keep careful records in case of an IRS audit. This way of managing your HSA makes a lot of sense if you’re maxing out your contributions, investing the HSA, and letting it ride, taking advantage of the tax-free growth.
It does require some detailed record keeping, but for the Type A people out there, it’s also an opportunity to roll up your sleeves and build some spreadsheets. (Fun, right?!)
3. Deciding When (and How Much) To Invest in Your HSA
Deciding when is easy: Now! The sooner you start investing, the better. There is a tendency, especially with younger investors, to seriously overthink this issue. People are tempted to try to “time” the market to maximize future returns. With an account as important as the one you will rely on for health expenses, however, a slow and steady investment strategy is almost sure to be more beneficial in the long run than large, sporadic investments.
It's a good, general rule of thumb to remember that markets almost always move in an upward trajectory over the long-term. There is no need to try to beat the market. Invest your money today, and it will be worth more tomorrow.
As far as how much you invest, this, of course, will vary from person to person. Your HSA will have two main categories: cash on hand, and cash that is invested. A good rule to follow is to never invest money that you think you may need access to within the next five years. This can, of course, be tricky to predict, as unexpected medical needs arise. One approach? Consider keeping your out-of-pocket maximum or the amount of your deductible as cash on hand. Invest the rest. Others identify a dollar amount that would create financial hardship and keep that amount of cash at their disposal, investing what remains.
Bonus Tip: HSAs Are Portable
A Health Savings Account’s portability is one of its most appealing features.
What exactly does that mean? If you wish to move your money to a different provider, you are free to do so at any point, even if you’re still contributing through your plan at work. This can allow you to compare investment options and costs. If the provider of your employer-chosen HSA doesn’t have great options, you can open a second HSA and move what you’d like to invest to that account. Just be mindful of any rollover or account transfer fees and consider keeping your work-based account open as long as you plan to make payroll contributions (or receive employer contributions).
A Well-Funded HSA Will Put Your Mind at Ease
Our goal is to help our clients create a mindset of abundance and prosperity. At a time when more Americans than ever are living paycheck to paycheck, we believe that a radical shift in mindset is needed. Think long-term. Focus less on instant gratification and more on big wins that add up over time.
For the new, young investor who suddenly has disposable income for the first time in their life, it may be hard to get excited about an HSA when there are flashier ways to spend your cash. And while we believe there is nothing wrong with taking the occasional risk (so long as you can afford any potential loss), a firm foundation is the best way to ensure your long-term prosperity.
Studies suggest that over half of all Americans are unprepared to pay a $1,000 emergency medical debt. Think of how that weighs on our subconscious. It is difficult to feel prosperous when you are one accident away from financial strife.
An HSA is just one more tool that can alleviate your worries and allow you to live worry-free. If something bad happens, you’ll be covered. If not, that money will become yet another asset for you to grow and develop for the future.
If you already have an HSA or are looking to increase your HSA know-how, we suggest checking out Kelley’s advice on how you’re probably using your HSA all wrong.