Healthcare is one of those expenses that's pretty much unavoidable at any age. This means it's important to save for it at every age.
If you're on a high-deductible health insurance plan, your plan may be compatible with an HSA. And if so, it pays to contribute. That's because HSAs actually offer more tax benefits than any other account.
HSA contributions go in tax-free in the same manner as traditional 401(k)s and IRAs. So right there, you're getting to exempt some of your earnings from taxes.
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HSAs also allow you to carry funds forward indefinitely, and you can invest the money you don't need to withdraw right away. Investment gains in an HSA are tax-free, and so are withdrawals used for qualifying medical expenses.
But while investing your HSA is one of the best ways to make the most of that account, new data reveals that most participants aren't reaping that benefit. Only 18.7% of HSA participants invest the money in their accounts, according to the Plan Sponsor Council of America. And if you're not investing your HSA, you're missing out on a big opportunity.
Enjoy those tax-free gains while you can
There may come a point when you face a large medical expense and have to tap your HSA to avoid having it drive you into debt. But otherwise, your strategy for managing your HSA really should be to fund that account consistently, but then pay for near-term medical expenses out of pocket. That way, you can invest your HSA funds and grow that money into a larger sum.
Granted, an HSA isn't the only account that could give you the benefit of tax-free investment gains. You'll find this perk within 529 plans, as well as Roth IRAs and 401(k)s. But those accounts don't also give you a tax break on your contributions. HSAs do.
Meanwhile, let's say you contribute $50,000 to your HSA during your career, but thanks to your investments, you wind up with a balance of $120,000 by retirement age. Not tapping your account year after year could allow you to walk away with $70,000 in gains -- without owing the IRS a dime.
You might really need that money in retirement
Aside from the benefit of tax-free gains, another good reason to invest your HSA and avoid tapping it year after year if possible is that come retirement, your healthcare expenses could really soar. That's something that tends to happen with age. And it might happen at a time in your life when your income shrinks.
If you invest your HSA for many years, you might end up retiring with a large sum of money you can earmark for senior healthcare expenses. That could help alleviate a load of stress.
An opportunity you don't want to pass up
Clearly, a lot of people treat their HSAs as a savings account to tap as needed. But a much better bet is to treat it as an investment account and do what you can to help your balance grow. A robust HSA could be just the thing that makes it possible to cover your healthcare costs throughout retirement without breaking a sweat.
