If you're currently enrolled in a high-deductible health insurance plan -- one with a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage -- you may be eligible to fund a health savings accounts, or HSA, this year. And there are plenty of benefits to doing so.
HSAs give savers three different tax benefits. Contributions go in tax-free, investment gains are tax-free, and withdrawals are tax-free, as long as they're used to cover qualified medical expenses.
HSAs also give you plenty of flexibility with your money, since funds don't expire. Many people who use FSAs (flexible spending accounts) get frustrated by having to spend down a balance at the last minute due to not being able to carry funds from one year to the next.
But HSA funds never expire on you. And they're also available at all times, so if you need money, say, tomorrow, to cover a medical expense, tapping your HSA is surely an option.
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But while you certainly do not have to reserve your HSA for your senior years, holding off on tapping that account until retirement makes a lot of sense. Here's why.
You might need the money then more than you do now
It's hard to avoid healthcare expenses in general at pretty much any stage of life. But chances are, your medical costs are going to be higher in retirement than they are today. This is due to a combination of aging and Medicare's limitations.
Plus, in retirement, you may have to adjust to a lower income due to not working. So all told, you might end up needing your HSA a lot more in retirement than you do today, which is why you should really aim to reserve those funds for your senior years.
But that's not the only factor to consider. As mentioned, HSAs allow you to invest unused funds and grow them tax-free. So if you leave your HSA untapped until retirement arrives, you'll have more opportunity to grow your balance into a larger sum.
In fact, let's say you contribute $250 a month to an HSA over 25 years. If you keep taking withdrawals as medical bills arise, you might end up with just a few hundred or a few thousand dollars in that account by the time retirement rolls around. If you never take an HSA withdrawal during that 25-year period and your investments deliver an 8% yearly return, which is a bit below the stock market's average, you'll end up with over $219,000. That could make your senior healthcare expenses much easier to cover.
It pays to hold out
If you get stuck with a costly medical bill your paycheck can't cover and you have the funds in your HSA, then by all means, it's better to take a withdrawal rather than charge the bill on your credit card and pay interest on it. But if you can afford to leave your HSA untapped during your working years, do that. Saving that money for retirement could really make your senior years a lot less financially stressful.
