You Can Invest Money for Healthcare While Snagging a Tax Break. Here's How
KEY POINTS
- Investing money in a regular brokerage account won't result in a tax break.
- Investing in an HSA could result in tax savings, but you'll generally need to reserve that money for medical expenses only or be assessed a penalty.
- Once you reach age 65, you can withdraw funds from an HSA for any purpose and avoid that penalty -- you'll only be charged taxes.
Investing money is a great way to grow yours into a larger sum over time. And if you're able to snag a tax break along the way, even better.
Now, you may be aware that IRAs and 401(k)s offer the benefit of tax-free contributions. The problem, though, is that your funds are restricted until age 59 1/2. Take a withdrawal at an earlier age than that, and you'll face a 10% penalty for removing funds early (though there are some exceptions, such as being able to take a limited withdrawal to buy a first-time home).
On the other hand, if you want near-term access to your money, you can invest in a regular brokerage account. You won't get any tax benefits in the process, but you'll have the option to cash out investments at any time and for any purpose.
There may come a time when you decide to liquidate investments in your brokerage account to cover medical bills. If you do so, and your investments have gained value since you bought them, you'll be subject to capital gains taxes.
But what if there were a way to invest money for healthcare bills specifically and avoid a tax bill in the process? Well, actually, there is.
What can an HSA do for you?
Healthcare costs can be a burden at any stage of life, so it's important to have funds on hand to cover medical bills. And saving and investing in an HSA, or health savings account, is a great way to make medical costs more manageable.
An HSA is a hybrid savings and investment account. And it's loaded with tax benefits.
HSA contributions are made with pre-tax dollars, so if you put $1,000 into one of these accounts, the IRS won't tax you on $1,000 of earnings that year. You're allowed to carry HSA funds forward as long as you want to. And you can invest the money you don't withdraw for healthcare bills to grow it into a larger sum.
Investment gains in an HSA are tax-free, and so are withdrawals, provided they're used for medical purposes. If you take an HSA withdrawal for non-medical purposes, you'll be taxed and penalized.
However, once you turn 65, you can withdraw funds from an HSA for any reason without penalty. In that situation, non-medical withdrawals will be subject to taxes the same way traditional IRA and 401(k) withdrawals are.
Are you eligible to participate in an HSA?
To fund an HSA, your health insurance plan has to meet certain requirements that change yearly. This year, you must have a minimum deductible of $1,500 for individual coverage or $3,000 for family coverage. Your plan's out-of-pocket maximum must also be limited to $7,500 for individual coverage or $15,000 for family coverage.
It's possible to have a health insurance plan that's HSA-compatible one year but not another. So it's a good idea to review your options annually.
But all told, investing in an HSA is worth doing if you're able to. There aren't many other opportunities to snag a tax break in the course of investing to cover healthcare costs.
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