You probably already have some idea of what you'd like to do with your extra cash in 2023. You might be saving up to buy a new home or a car, or setting aside money for retirement.
Your goals will determine the best place for your money. For example, you can use a savings account for emergency expenses and a 401(k) or IRA for retirement savings. But you can also save for these goals in a health savings account (HSA). Here are three reasons you may want to stash some money here in 2023 if you're eligible to do so.
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1. You can earn nice tax breaks
The money you put into an HSA reduces your taxable income for the year, just like contributions to tax-deferred retirement accounts. If you earn $50,000 in 2023, for example, and you stash $3,000 of it in an HSA, the government will only tax you on the remaining $47,000.
But what makes HSAs an even better deal is that you won't pay taxes on the money you keep here at all if you use it for medical expenses. So this can be a great place to store emergency savings you can use if you unexpectedly become ill or injured. Or if you know you have a medical procedure, like surgery, coming up, you can save for it here, instead of in a savings account, and enjoy the tax break.
First, check that you're eligible to contribute to an HSA. You're only allowed to do so if you have a health insurance plan with a deductible of at least $1,500 for an individual or $3,000 for a family in 2023.
If you qualify, be careful not to exceed the annual contribution limits. These are $3,850 for those with individual health insurance plans and $7,750 for those with family plans. Adults 55 and older can save an additional $1,000 in their HSAs in 2023.
2. You can use it for retirement savings
Unlike flexible spending account (FSA) funds, your HSA funds roll over from one year to the next, so you can leave the money in your account as long as you need to. Because of this, some people use HSAs to save for their retirement medical expenses.
You can also make non-medical withdrawals from the account beginning at age 65. You'll pay taxes on these, but you'll avoid the 20% early withdrawal penalty the government charges adults under 65 for these withdrawals.
Your HSA is effectively another retirement account if you choose to use it that way. But if you're going to do this, find a provider that enables you to invest your HSA funds. Otherwise, your balance won't grow very quickly.
3. You won't have to worry about required minimum distributions (RMDs)
Most retirement accounts, except Roth IRAs, have required minimum distributions (RMDS), which are annual withdrawals that all seniors must take from their retirement accounts beginning in the year they turn 73. This ensures the government gets its share of your retirement savings from the taxes you pay on withdrawals.
RMDs may not be a big deal for you, depending on how much you withdraw from your retirement accounts each year. But it could lead to a larger tax bill than you were expecting. And skipping them isn't an option. If you do, you'll pay a 25% penalty on the amount you should have withdrawn.
Keeping some of your retirement funds in an HSA could help you avoid this, as HSAs don't have RMDs. This makes it a good home for money you don't plan to spend anytime soon, or money you hope to pass to your heirs after your death.
You may not want to use an HSA as your primary retirement account, especially if you have access to a workplace plan that offers a match. But if you have a little extra cash, consider stashing some here in 2023. Between medical care and retirement, you should be able to find a good use for it.
