7 Good Reasons You Should Consider a Health Savings Account
Health Savings Accounts also referred to as HSAs, can be a powerful financial tool in your pursuit to maximize your dollars and build wealth.
Why? Because these unique financial accounts are arguably one the most tax-friendly savings tools for those with high deductible health savings plans, making them highly attractive to save as much money as possible into them for qualified medical expenses.
While not everyone is eligible to open an HSA, it is something worth looking into if you are currently enrolled in a high deductible healthcare plan. If you aren’t currently enrolled in a high deductible healthcare plan, the option may be available to you through your employer.
Here are seven good reasons to open a Health Savings Account and use it as part of your overall wealth-building strategy.
History of Health Savings Accounts
Before we jump in, let’s look at the origin of the HSA and why it was established in the first place.
In December of 2003, Health Savings Account was established in response to the Medicare Prescription Drug Improvement and Modernization Act of 2003 under President George W. Bush. They were created so that people covered by high deductible healthcare plans could more easily save and afford future medical expenses. Medical expenses have always been difficult for Americans to afford and this was one solution passed by Congress that aimed to make it easier to pay for medical expenses.
There is history regarding how these things came into being and the political process it went through to become what it is today. I won’t dive into all that, but if you’re curious you can glean some more insights about it here.
7 Reasons to Consider a Health Savings Account
There is not much not to like about these robust and tax-efficient savings vehicles. Here is the quick and mighty run down of what makes the HSA an attractive savings option.
1. Tax-Free Contributions
The money that goes into an HSA is not taxed. Therefore, it offers a tax benefit in the year you contribute to it just like when you contribute to your company 401(k).
2. Tax-Free Growth
The money that you earn inside an HSA is not taxed. This makes it similar to a Roth IRA except that the money that you contribute isn’t taxed and now the growth of that money also isn’t taxed.
3. Tax-Free Distributions For Medical Expenses
The money you use from your HSA to cover qualified medical expenses is not taxed. Therefore, all the money you contribute and all the growth of that money is never taxed when it is used to cover medical costs.
4. 1x Year-End Contributions
You don’t have to contribute to an HSA regularly throughout the year. You can make a one-time contribution before filing your tax return. For 2021, the HSA contribution limits have increased due to inflation. An individual with self-only coverage under an HDHP can contribute up to $3,600, a $50 increase. For those with family coverage, the new limit is $7,200, a $100 annual increase.
5. Past Medical Bills Can Be Applied in Future Years
Your HSA dollars aren’t ‘use or lose’ like a Flexible Spending Account. Your HSA account continues to grow and you can choose to wait to apply your HSA dollars to medical expenses incurred in prior years. This gives you more flexibility and an opportunity to grow your HSA account.
6. Funds Can Be Invested in Mutual Funds Just Like Your Retirement Accounts
HSA accounts are composed of mutual funds similar to your retirement accounts like IRAs and 401(k)s. This gives you the flexibility of choice in how your HSA dollars are invested and how much risk you are willing to take on in your investment composition.
7. Withdrawals After Age 65 for Non-Medical Purposes Avoid the 10% Penalty
Once you turn 65, your HSA no longer is subject to the 10% penalty if you use the money for non-medical costs. This means that the HSA functions more like a regular retirement account that you can take distributions from. In this case, it would be another bucket of tax-free savings along with a Roth IRA that can help minimize your tax liability in retirement. It is no different than your 401(k) if used this way.
If you have been wondering if an HSA is right for you, I encourage you to look into it more closely. Many people think that having a high deductible healthcare plan would be too costly, but then when we run the actual numbers of what it cost them versus their current healthcare plan, it usually isn’t that much more than what they were already paying with a lot more potential benefits. Your financial advisor can help you run the numbers to see if a high deductible health plan is right for you and your family. The cost savings tend to surprise people even with a higher deductible.
If you don’t have a financial advisor or are looking to switch, feel free to reach out to us at Afton Advisors to help you understand your financial opportunities and take control of your money.