If you like the idea of having funds on hand to cover healthcare expenses, and you like saving money on taxes, then an HSA is an account that it pays to fund, provided your health plan is eligible. You'll need to be enrolled in a high-deductible plan to qualify for an HSA, and if you're on Medicare, contributions are prohibited.
HSAs give you a tax break on the money that goes into your account, similar to a traditional IRA or 401(k). Funds you don't need to withdraw immediately can be invested, and gains in an HSA are tax-free, as are withdrawals taken for qualified healthcare expenses.
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In fact, the nice thing about HSAs is that they essentially combine the best features of both traditional and Roth retirement savings plans. You get the tax break on your contributions, but also, the tax break on gains and withdrawals. It's really a win-win.
But if you're going to make an effort to fund an HSA, it's important to manage that account wisely. And you may want to follow the lead of the 20% of HSA savers who are taking one specific approach.
Set yourself up for less stress in retirement
A good 20% of HSA savers this year say they're contributing to their accounts in order to invest the money to have on hand for healthcare expenses in retirement, according to data from the Employee Benefit Research Institute. And that's a really smart decision.
It's true that healthcare expenses can arise at any time. And you may be tempted to tap your HSA for near-term medical bills that pop up so you're not left scrambling to come up with the money.
But if you want to enjoy the maximum benefit an HSA can provide, then you should really try to leave your balance alone and let it grow in a tax-advantaged manner. That way, by the time you get to retirement, you'll ideally be sitting on quite a large sum.
Also, as tough as it may be to cover your healthcare costs while you're working, imagine how much more of a financial burden your medical care might be once you're retired and no longer earning a paycheck. Many seniors, in fact, are caught off guard by how expensive healthcare is under Medicare. So if you want to avoid a financial crunch later in life, you, too, should consider investing your HSA with the goal of reserving your balance for your post-career years.
And if you're wondering how HSAs and Medicare work together, here's the scoop. As mentioned earlier, you can't contribute to an HSA once you enroll in Medicare. But you can absolutely take HSA withdrawals to cover Medicare expenses.
A strategy worth following
If you're going to start reserving your HSA for retirement healthcare expenses only, then you'll need to pad your emergency savings to ensure that you're able to cover your near-term medical bills without resorting to debt. But if you're willing to make that effort, you may find down the line that while your fellow retirees are struggling to cover their healthcare costs, you're in a solid position to tackle those bills with ease.
