9 Reasons You Should Take Advantage of Your HSA

Many people are familiar with flexible spending accounts, or FSAs. But health savings accounts, or HSAs, offer even more flexibility. If you're eligible to participate in an HSA, here are nine reasons it pays to do so.

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Many people love putting money into an IRA or 401(k) plan because it results in an up-front tax break. HSAs work similarly in that the money you contribute goes in tax-free, lowering your IRS burden.

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When you put money into an FSA, it just sits in your account until you use it. When you fund an HSA, any money you don't need immediately can be invested so that it grows into a larger sum.

The upside of saving money in a Roth IRA is that your investments in that account get to grow tax-free. Investment gains in an HSA get that same benefit.

Just as Roth IRAs allow for tax-free withdrawals, so too do HSAs. The only catch is that you must remove funds for qualified medical expenses to avoid taxes on those distributions.

ALSO READ: Investing Your HSA Money

When you put money into an FSA, you must use it up by the end of your plan year or risk forfeiting it. HSA funds can be carried forward indefinitely, so there's less pressure to estimate your healthcare costs on a year-to-year basis.

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Because HSA funds don't expire, you can carry that money all the way into retirement. That way, you'll have an extra income source on top of your savings and Social Security benefits.

Normally, if you withdraw money from an HSA for a nonmedical expense, you'll be subject to a costly 20% penalty. But once you turn 65, you can take an HSA withdrawal for any purpose and avoid that penalty. However, you will be taxed on your withdrawal in that situation.

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Many retirees are shocked to learn how expensive healthcare is. Between Medicare premiums, deductibles, and noncovered services, healthcare could eat up a large chunk of your senior income. Having money in an HSA could come in very handy once you're no longer working.

Healthcare bills can throw your budget off course. If you have funds socked away in an HSA, you'll have less to worry about when your expenses climb unexpectedly.

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Not everyone can participate in an HSA. To qualify, you must be enrolled in a high-deductible health insurance plan, the definition of which changes from year to year. But if you are eligible, funding an HSA could be one of the smartest financial decisions you'll ever make.

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