There are many ways to save for retirement beyond the standard 401(k) and IRA. For example, take the oft-underutilized health savings account (HSA). Although it's not meant to be a direct retirement savings vehicle, the benefits it provides to people later in life are immense. Read on to learn more about these accounts.
What is it?
What is a health savings account?
A health savings account (HSA) is a type of savings account that can be used to help cover medical expenses today and major healthcare-related expenses after retirement. They're considered triple-tax-advantaged: You can contribute to them tax-free, pay for qualified medical expenses from them without paying taxes, and they can grow investments tax-free.
Of course, HSAs are subject to a number of strict rules about how they can be used and who can use them. However, if you qualify for an HSA, you should certainly consider opening one, if only for the option to reap the tax rewards on your regular medications and doctor's visits.
How it works
How does an HSA work?
On the surface, an HSA works like any other savings account, but not everyone can have one. You must qualify by being enrolled in a high-deductible health insurance plan, currently defined as having a deductible of at least $1,600 for an individual or $3,200 for a family in 2024. You will also have limits on what you can contribute, with 2024 limits being $4,150 for individuals and $8,300 for families.
When you need to pay for a qualified medical expense, you can use your card, like a debit card, or pay from another account and request reimbursement. If you don't use all your money in the calendar year, it'll simply roll into next year without affecting how much you can contribute in the new year.
What's covered?
What expenses can you use an HSA for?
Once set up, you can use your HSA for a whole list of qualifying medical needs, even if you're under 65. Expenses that can be included run the gambit, but here are a few examples:
- Artificial limbs and teeth
- Ambulance services
- Contact lenses
- Diagnostic services
- Eyeglasses
- Medication
- Operations
- Psychiatric care
- Transplants
- Weight-loss programs
You can also use your HSA to pay for things like qualified long-term care insurance contracts, which can make it easier to pay for long-term care while on Medicare. Medical expenses for service dogs are also covered by your HSA, provided the dog is specifically trained to perform a service for a person with a disability and not simply an emotional support animal.
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HSA vs. FSA
HSA versus flexible spending account
It's really easy to get HSAs and flexible spending accounts (FSAs) confused. They serve very similar purposes, but they have some very significant differences, the main being:
- Contribution rollovers. HSAs allow indefinite contribution rollovers, so you always have the money you've put in. FSAs, on the other hand, require you to use your money or lose it at the end of the year.
- Withdrawals. You can withdraw your money from an HSA, albeit with a penalty. FSAs will not let you withdraw your money at all, which makes it even more important that you accurately estimate your need before contributing.
- Investments. HSAs have an added feature: Since your money is yours and always stays in the account, you can also choose to invest what you're not planning on using, allowing your HSA to grow even faster. An FSA can't allow you to invest because of the use-it-or-lose-it nature of the account.
- Self-employment. HSAs are available to qualified self-employed individuals, but FSAs can only be secured by employees of businesses that participate in the program.
- High-deductible health insurance. HSAs require enrollment in a high-deductible health insurance plan, which is not a requirement of an FSA.
