High-deductible health insurance plans are becoming increasingly common, and few people like them, but they've given us one good thing: the health savings account (HSA). You probably know that these accounts can help you save money for medical expenses, but that's not all they do. Here are four things everyone should know about HSAs.
1. You could get two tax benefits.
HSAs are similar to many tax-deferred retirement accounts in that your contributions reduce your taxable income for the year. But unlike with 401(k)s and traditional IRAs, you don't have to pay taxes when you make withdrawals from your HSA as long as you use the money for medical or dental expenses.
You can use the money for nonmedical expenses, too, although that's not as good a deal. If you do, you'll pay income tax plus a 20% penalty if you're under 65. Once you reach age 65, nonmedical expenses are still subject to income tax, but there's no penalty.
2. There are limits on who's eligible and how much you can contribute.
HSAs are available only to those with high-deductible health insurance plans, which are defined as plans with deductibles of more than $1,350 for an individual or $2,700 for a family in 2019. Adults of any age can contribute to HSAs if they meet the above requirements, but those 65 and older can do so only if they're not enrolled in Medicare. Once you sign up for Medicare, you can still use your existing HSA funds, but you can't make new contributions.
The government also imposes limitations on how much you can contribute to HSAs each year. Individuals are allowed up to $3,500 in 2019, while families are allowed a maximum contribution of $7,000. Adults 55 and older can make an extra $1,000 in catch-up contributions. These limits can change from year to year, so it's important to stay on top of them if you intend to contribute as much as you can.
3. You can use your HSA to save for retirement.
As I mentioned above, once you turn 65, the penalty for nonmedical HSA withdrawals disappears and your HSA becomes similar to a traditional IRA -- with one key difference. Traditional IRAs require you to start taking required minimum distributions (RMDs) when you turn 70 1/2, unless you're still working and don't own more than 5% of the company you work for. It's the government's way of forcing you to pay the taxes you owe on your savings.
HSAs don't have this restriction -- at least not yet. So you can leave your money in the account as long as you like. Your HSA funds roll over from year to year, so you don't risk losing them if you don't spend them in time, as with flexible spending account (FSA) funds. This makes your HSA a useful place to stash extra retirement savings if you've already maxed out your 401(k) or IRA for the year.
4. You may be able to invest your HSA funds.
Some HSAs give you the option to invest your money in mutual funds or other investment products to help that money grow. Whether you're using the account for medical expenses, retirement savings, or both, this is a valuable opportunity to grow your savings without setting aside more of your hard-earned cash.
Seek advice from a financial advisor if you're not sure how to invest your HSA funds appropriately. Choose a fee-only financial advisor instead of one that's fee-based. Fee-based advisors may earn commissions if you purchase certain investment products, and this could lead them to recommend investments that aren't in your best interests.
If you've thought about HSAs only as a place to stash savings for medical expenses, you're missing the bigger picture of what they could do for you. Consider opening one if you're eligible or boosting your HSA contributions if you already have one. When it comes time to retire or to file a medical insurance claim, you'll be glad you did.