There are many elements to consider when developing a financial plan; along with figuring out a budget that accounts for your income and expenses, it’s good to think about investments. Most people automatically think about a 401(k) or the stock market when they’re considering investment options, but there is another excellent choice: the Health Savings Account.
HSAs are the unsung heroes of financial planning, but many people overlook them because they only think of them in relation to health insurance. An HSA is certainly a vital element of a health insurance plan, but it can also be an important part of building wealth and planning for retirement.
At Guiding Wealth, we don’t always advise our clients on their health insurance decisions. Most people have a pretty good handle on their options and take care of that decision on their own. But we do spend a lot of time discussing HSAs. This type of account impacts far more than just your current healthcare spending.
What is a Health Savings Account?
An HSA is a special type of savings account where you can put aside money for medical expenses. You can use the money in an HSA to pay for qualified healthcare expenses, including deductibles, coinsurance, and copayments. In most cases, you can’t pay your health insurance premiums using HSA funds.
There are a few key things to know about HSAs:
- HSA funds roll over every year if you don’t spend all of them.
- You can spend HSA dollars at any time, but you can only contribute to an HSA when you have health insurance in the form of a High Deductible Health Plan (HDHP).
- If you have an HDHP, you may contribute pre-tax funds to your HSA up to a certain amount specified by the government.
- The funds in your HSA may increase through interest or other earnings, which are not taxed.
- If you pull out HSA funds to use on non-qualified expenses, you pay a 20% penalty and taxes on the money. (The penalty doesn’t apply to individuals 65 and over, but funds are still taxable unless they are used for eligible medical expenses.)
For 2022, the HSA annual contribution limit for an individual with self-only coverage is $3,650. For family coverage, the limit is $7,300.
HSAs Offer Excellent Tax Benefits
One of the best things about HSAs is that they provide multiple tax benefits; essentially, you get triple tax savings!
- Your HSA contributions use pre-tax dollars if you make them via a payroll deduction. (If you’re self-employed, you can contribute after-tax dollars and then use a line-item deduction on your Schedule C form.)
- The interest, dividends, and other types of earnings on your HSA funds are tax-deferred.
- You don’t pay taxes on the money you pull out of the HSA as long as you use it for qualified healthcare expenses.
A Health Savings Account is an excellent investment tool that can also lower your tax burden.
Getting the Most Out of Your HSA
For many people, it makes sense to max out HSA contributions each year (until qualifying for Medicare at age 65). It’s essentially another way to invest and prepare for retirement.
Those funds can just live in your HSA account year after year and continue earning non-taxable interest. Once you enter retirement, you can use those HSA funds to cover many of your healthcare expenses. A Health Savings Account gives you tax benefits now and healthcare benefits later.
Upgrade Your Retirement Planning With an HSA
Health Savings Accounts provide countless benefits for individuals and families, and they’re especially useful in retirement planning. By investing in your HSA, you can enjoy significant tax benefits and protect your finances against unexpected healthcare costs. A well-funded HSA helps ensure that you will be able to cover your medical expenses during retirement.
An HSA is just one aspect of financial planning that’s easy to overlook. Retirement planning can be complicated, especially when you’re trying to balance financial stability and immediate tax benefits with long-term wealth building. Guiding Wealth is here to help.
When you work with a Certified Financial Planner™, you’ll get expert advice to make the most of your finances now and in retirement. Schedule a consultation online or call us at 214-810-3835 to get started.