Healthcare expenses can be a burden at any stage of life. With deductibles, co-pays, and non-covered expenses, you could easily land in a situation where a large portion of your paycheck is spent on medical bills.
That's why it's so important to have funds available for healthcare bills. So socking money away in an HSA (or health savings account) is an option worth pursuing.
But recent data from Bank of America (BAC 0.83%) shows that most HSA holders could be squandering an opportunity to make the most of their accounts. And if you're in that same boat, that's a mistake you'll want to correct sooner rather than later.
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Are you making the most of your HSA?
One major benefit of funding an HSA is getting a tax break on the money that goes into your account. But another perk of saving in an HSA is that you get to invest funds you don't need right away to cover medical bills.
Investments in an HSA get to grow tax-free. And HSA withdrawals are tax-free provided that money is used to cover qualified healthcare expenses.
But Bank of America finds that only 12% of HSA holders are investing their accounts for future growth. And if you're not investing your HSA balance, you're passing up a big opportunity to grow your balance while reaping tax savings.
Now, it could be that some people aren't investing their HSA funds because they need them right away. If that's preventing you from investing, one strategy is to fund an HSA in conjunction with a regular savings account with money earmarked for medical spending. That way, you can tap the latter when near-term bills arise and leave the former alone to grow.
It's also generally a good idea to reserve as much of your HSA balance for retirement as you can. Healthcare costs can soar during that period of life for a number of reasons, from issues related to aging to the fact that Medicare's coverage is limited. So if you're able to avoid tapping your HSA constantly during your working years and instead invest that money to grow on a long-term basis, you'll no doubt be doing your future self a favor.
Of course, if given the choice between taking money out of an HSA versus racking up a balance on a credit card to cover a near-term medical bill, the former is obviously the savvier way to go. You might earn an 8% return or so in your HSA if you invest it over time, as that's a bit below the stock market's average, while you might pay 20% on a credit card balance used to cover a medical bill.
But if you have HSA funds you don't need immediately, invest them. It's basically an opportunity to grow your balance without having to fork over more funds, and you won't even have to worry about your investment gains creating a tax liability in the process.
