Healthcare is one of those expenses that's pretty much unavoidable. Being young and fairly healthy doesn't guarantee that you won't face your fair share of medical bills at some point, because you never know when you might get hurt or fall unusually ill.
That's why it's so important to have money set aside for healthcare expenses. And if your health insurance plan is compatible with an HSA, or health savings account, then it's definitely worth taking advantage.
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Like traditional IRAs and 401(k)s, HSAs are funded with pre-tax dollars. So if you put $1,000 into an HSA, that's $1,000 of income the IRS can't tax you on.
It may be that you contributed money to your HSA this year. But what if you have remaining funds as of mid-December and you don't have any upcoming medical expenses to spend them on?
The good news is that there's no pressure at all to deplete that balance by the end of the year. So if you still have 2023 funds in your HSA as of now, your best bet is to actually do nothing and keep that money invested.
It's not an FSA
Many people are familiar with FSAs, or flexible spending accounts. These plans give you a tax break on the money that goes into your account. But FSAs generally require you to spend down your plan balance year after year or otherwise risk forfeiting leftover funds.
HSAs work differently, though. With an HSA, your funds never expire. You could contribute $2,000 to an HSA in your mid-20s and withdraw that money in your late 60s to cover medical expenses. And that, in fact, is something you should plan to do -- reserve your HSA funds for retirement.
Unlike FSAs, HSAs allow you to invest unused funds so your money can grow into a larger sum over time. Investment gains in an HSA are tax-free, and so are withdrawals that are used to cover qualifying healthcare expenses.
As such, if you have money left in your HSA this year, don't rush to spend it at all. Instead, keep it invested so you're able to capitalize on more tax-free growth.
In fact, one of the best strategies for saving in an HSA is to specifically not tap your balance to cover near-term medical expenses, but rather, keep that money in place until retirement arrives. Once you get older, you may find that your healthcare expenses start to soar. But this way, you'll ideally set yourself up with a pile of money to tap as those bills come in.
A backup retirement plan
Another good reason not to force yourself to spend down your HSA balance if there's no pressing need? Once you turn 65, your HSA can double as a general retirement savings plan.
When you're under age 65, HSA withdrawals taken for non-medical purposes are penalized heavily. But those penalties are waived once you turn 65.
At that point, your HSA works just like a traditional IRA or 401(k) in the context of non-medical withdrawals. There are no penalties, but distributions are treated as taxable income.
All told, HSAs are an extremely flexible savings tool. So don't sweat it if you're sitting on funds you don't have earmarked for near-term medical bills. There's no pressure at all to use up that money anytime soon.
