Of the various expenses that eat up too much of your income for comfort, healthcare is an oft-unavoidable one. But if you have access to a health savings account, or HSA, you'll have an opportunity to ease the burden of paying for healthcare by doing so in a tax-advantaged fashion.
When you fund an HSA, your contributions are tax-free. You then get the option to invest HSA funds you're not using immediately for added growth that isn't subject to capital gains taxes. And HSA withdrawals are always tax-free when they're used to pay for qualified medical expenses.
Of course, participating in an HSA is a smart move by itself. But if you really want to make the most of that account, here are three important steps to take.
1. Contribute more money than you need each year
If you're familiar with the flexible spending account, or FSA, you may be in the habit of estimating your healthcare costs on a yearly basis and contributing just that amount for your near-term needs. After all, FSA funds must be depleted on a yearly basis; savers who don't spend down their FSA balances risk forfeiting that remaining money.
HSA funds, however, don't expire, so you can carry your balance forward for as long as you like. In fact, you should make an effort to contribute more to your HSA than you think you'll need in the near term. That way, you can invest the funds you aren't using immediately and capitalize on the tax-free growth we just talked about. You can even think of your HSA as a retirement savings tool; and the more you're able to grow your balance, the better equipped you'll be to pay for healthcare as a senior, when it can really be a burden.
2. Avoid tapping that account for expenses you can afford
When you have money in an HSA, your first inclination might be to withdraw from that account every time you incur medical bills. After all, that's what that money is there for. But if you avoid tapping that account for every single expense you rack up, you can continue investing the money in it, thereby growing your balance in a tax-free fashion.
3. Take advantage of catch-up contributions
Just like popular retirement savings plans like IRAs and 401(k)s offer catch-up contributions, so too do HSAs come with higher annual contribution limits for older workers. If you're 55 and over, you can contribute an additional $1,000 a year on top of today's limits -- which are currently $3,500 for individual coverage and $7,000 for family coverage. Keep in mind that these limits are increasing to $3,550 and $7,100, respectively, in 2020. The more money you put into your HSA, the more you'll get to invest. Just as importantly, the higher your contributions, the more income you'll shield from taxes.
Not everyone is allowed to contribute to an HSA. To qualify, you must be on a high-deductible health insurance plan, defined currently as a deductible of $1,350 or more for individual coverage or $2,700 or more for family coverage. And in 2020, you'll need an individual deductible of $1,400 or more, or a family deductible of $2,800 or more, to participate in an HSA.
You're also limited to a specific out-of-pocket maximum. For the current year, you're looking at $6,750 at the individual level and $13,500 at the family level. Come 2020, you're looking at $6,900 as an individual and $13,800 as a family. But if you do have the option to fund an HSA, it pays to not only sign up, but also use these tips to maximize that account to the fullest.