Health savings accounts (HSAs) are surging. In 2016, 72 percent of large corporations offered them to their employees; that number represents a 40 percent increase since 2010, according to statistics released by the National Business Group on Health.
Amid the concern and confusion introduced by the Affordable Care Act, the health savings account stands out for a number of reasons:
- Those eligible receive not one, but three levels of tax benefits
- Money accumulates on a tax-deferred basis
- Any withdrawals to pay for medical care are tax-free
HSAs are more flexible than you might be led to believe. Much like an IRA, an HSA allows you to make contributions for the previous year until April 15—this
extended period gives you even more time to reduce your taxable income. As of 2016, employees can set aside up to $3,350 for individuals and $6,750 for family plans. If you are 55 or older you can set aside an additional $1,000 a year. The best thing is that you don’t have to worry about any “use-it-or-lose it” rules; you can use your HSA to stash away money until you need to withdraw it.
Even if you aren’t super healthy and don’t have the luxury of low medical bills, an HSA can still pay off. According to the Employee Benefit Research Institute (EBRI), high-deductible employer plans typically have a cost of $1,000 to $2,000 less per year than a traditional health insurance plan. In addition, many organizations sweeten the deal by adding their own contributions to employees’ accounts.
The Long-Term Horizon
If you are a high-income earner, you might discover that the HSA becomes a clever way to create something akin to a super IRA. Any time before the age of 65, you can continue to fund your HSA, paying for any healthcare expenses out of your own pocket without withdrawing any money from your HSA. Make sure, however, that you keep the receipts for all qualified medical expenses that you paid for yourself.
The investment strategy works best for those with a higher income, as most people will need to turn to their HSA account throughout their working life to pay for their healthcare expenses. However, if you are able to cover your healthcare costs and fund your HSA account, you’ll find it is an effective way to amass an additional income stream for your retirement.
More About Those Triple Tax-Free Benefits
Is all the hype about triple tax-free benefits true? Are there caveats that you need to be aware of or rules that affect the way you use your HSA?
Here’s all you need to know:
- Depending on your HSA provider and the services offered, you may not be limited to holding a cash-only HSA account. Many companies offer a range of investments and mutual funds as an alternative.
- Unlike Flexible Spending Accounts, you won’t lose it if you don’t use it. Your HSA funds will simply roll over to the next year until you need to use them.
- Your 401(k) is linked to your employer, but your HSA is not tied in. You can open one anywhere as long as you meet the deductible requirements.
- You are permitted to make a withdrawal from your HSA for qualified medical expenses tax-free at any time.
Getting the Balance Right
The best way to use your HSA is to max out on your annual contributions. You can keep enough aside to cover your short-term requirements and invest the rest in a mix of bond funds and stocks that can be used for your medical expenses once you retire. However, according to the EBRI, less than 4 percent of HSA holders think about the long-term gains.
If you are looking for your own individual HSA, take the time to compare different options. Some accounts charge debit fees or fees for maintenance, and others may not offer alternative investment options. By comparing accounts you can find an HSA that is not only affordable but fits in with your long-term plans.
Is an HSA the Right Choice for You?
An increasing number of people discover that using a high-deductible health plan and a health savings account is the best choice. Being able to carry balances forward, and, with some custodians, invest the funds, you could find that an HSA is the most cost-effective way to cover your healthcare costs now and in the future.
If you work for a large organization you will usually have a range of health insurance options available to you. Sit down to work your recent and possible projected health care costs to determine whether an HSA will be a cost-effective and viable option. For high-income earners who can afford to pay for health care costs without touching their HSA plan, this type of account makes for a very sensible retirement solution.