3 Reasons Why HSAs Are a Great Deal
- HSAs allow you to set money aside for healthcare expenses.
- Before you write off the idea, consider the benefits involved, including tax breaks and flexibility.
It pays to put your money into one.
Healthcare is an unavoidable expense for Americans of all ages. And if it's not currently a big expense for you, chances are, it will be at some point in time. That's why it pays to put money into a health savings account, or HSA.
An HSA is a hybrid savings and investment account. You can contribute funds for healthcare expenses and withdraw them as needed. But while that money is sitting in your account, you can invest it for added growth, the same way you can invest funds in a brokerage account.
Now, you may be hesitant to put money into an HSA because you want the option to access it at any time, like you can with a savings account. But here's why it really does pay to fund an HSA.
1. They're triple tax-advantaged
If you have a traditional IRA, you get a tax break on your contributions. If you have a Roth IRA, you get to enjoy tax-free investment gains in your account as well as tax-free withdrawals. With an HSA, you actually get all of these benefits. The money you put into an HSA goes in tax-free, investment gains are tax-free, and withdrawals are tax-free when used to cover qualified medical expenses like medication copays, eyeglasses, and dental care.
2. They're flexible
Flexible spending accounts (FSAs) actually aren't so flexible. That's because you must commit to an annual contribution ahead of time rather than being able to adjust your contributions as needed. And then, if you don't spend down your FSA balance by the time your plan year wraps up, you risk forfeiting your money.
HSAs are far more flexible than FSAs. For one thing, you can contribute funds steadily during the year -- it doesn't have to be a single lump-sum contribution. Also, you're not required to use up your balance every year. In fact, the best way to maximize an HSA is to leave at least some of your money invested so it can gain value.
3. They can become a regular retirement account later in life
If you tap an HSA for a non-medical withdrawal, you'll be penalized 20% of the sum you remove. But once you turn 65, that penalty goes away -- no matter what you use your HSA for. As such, come age 65, you can really treat an HSA as a regular retirement account. And while you will pay taxes on non-medical withdrawals, that's no different than the taxes you'd pay for taking withdrawals from a traditional IRA or 401(k) plan.
It pays to fund an HSA
HSAs are pretty great -- there's no question about it. And so if you're eligible to fund one, it pays to take advantage of it.
That said, not everyone is able to contribute to an HSA, as eligibility hinges on being enrolled in a high-deductible health insurance plan. Other restrictions apply, too -- you can't fund an HSA while on Medicare, for example.
If you're not sure whether you're eligible to participate in an HSA, contact your health insurance plan administrator to see if your plan is compatible or not. If you get insurance through your employer, someone in your benefits department should be able to answer that question for you as well.
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