The ever-rising costs of American health care have been a concern for ages. Congress sought to do something about that in 2003, passing a plan that encourages citizens to save money for their health care needs. Such was the birth of health savings accounts (HSAs).
A health savings account (HSA) offers a great option to lower your taxable income and save for health care expenses. Some people might not realize, though, that it can also be an effective retirement savings tool.
HSAs can serve as individual retirement accounts that offer several benefits. This guide will walk you through these accounts, how they work, and how to build an HSA investment strategy that works for you.
What Is a Health Savings Account?
Health savings accounts allow you to set aside dollars for qualified health care expenses such as deductibles, copayments, and coinsurance. That money isn’t taxed when it’s deposited in the HSA or withdrawn, so it can be a significant benefit. Employers may provide an account for their employees, or you can open one via a bank or another financial institution.
The IRS limits the amount of money you can contribute to an HSA. People with coverage under a qualifying high-deductible health plan (deductible of $1,400 or more) in 2021 can contribute up to $3,600, with a maximum out of pocket of $7,000. Those with family coverage under a qualifying high-deductible health plan (deductible of $2,800 or more) can contribute up to $7,200, with a maximum out of pocket of $14,000.
People age 55 and older can contribute an additional catch-up contribution of $1,000 per year to their health savings account. Those with a spouse who is also 55 or older can also establish a separate HSA and make a catch-up contribution to that account.
Do You Need a Health Savings Account?
Health savings accounts aren’t required, but the benefits of having one can be substantial. Anyone with ongoing health issues should consider them a must. Here are some benefits of HSAs:
1. Coverage for a Wide Range of Health Care Expenses
HSAs can be used to cover some or all of the cost of medical, dental, and mental health expenses. The IRS offers a complete list of qualified medical expenses for HSAs. And the CARES Act further expanded the list of qualified medical expenses for these accounts to include non-prescription over-the-counter health care products and medications.
2. Multiple Parties Can Provide Contributions
The IRS has no restrictions on who can add to your HSA. This means you can contribute to your account or allow your employer, relatives, or others to do so.
3. Fund Rollover
There is no need to stress if you do not use all of your health savings account funds by the end of the year. You can roll over the money left in your HSA to the following year. Unused HSA funds roll over annually until the age of 65; at this point, the owner can use them for retirement expenses.
Your health savings account stays with you. Your account funds are always available for qualified medical expenses, even if your health insurance changes.
5. Pretax Contributions
An HSA set up through your employer may help you earn more money annually. Account contributions can be made with pretax dollars via payroll deductions through an employer. The contributions are therefore not included in your gross income and not subject to federal income taxes.
6. Tax Savings
You can use after-tax dollars to contribute to your health savings account. These dollars can be deducted from your gross income on your tax return, lowering your annual tax bill.
7. Tax-Free Account Withdrawals
Health savings account withdrawals are not subject to federal taxes, as long as you use your funds for qualified medical expenses. You can start withdrawing funds from your HSA at any age without penalty. This makes HSAs exceedingly valuable when saving for retirement, particularly compared to a 401(k) or other traditional investment options.
It’s essential to explore every investment opportunity to save for retirement. As you assess investment opportunities, you may quickly discover that an HSA investment strategy can help you maximize your retirement savings.
5 Tips for How to Create a Successful HSA Investment Strategy
Your goal: grow your health savings account as much as possible. Doing so requires a comprehensive HSA investment strategy to use as a guideline.
An investment strategy can make a world of difference relative to saving for retirement. Let’s look at five tips to help you create a strategy that enables you to achieve your investing goals.
1. Treat Your HSA Like an Investment Account
Don’t use your HSA funds unless you need them for health care expenses.
2. Max Out Your Annual Account Investment
Invest the maximum amount allowed into your account annually. Those age 55 and older can also take advantage of the $1,000 annual catch-up allowed by the IRS.
3. Leverage Employer-Matching Contributions
Sign up for an HSA if an employer offers it. Use employer-matching contributions to grow your account further if those are available.
4. Invest Your Unspent Contributions Wisely
Consider a diverse investment portfolio for your unspent health savings account contributions. This helps spread out risk and minimize the possibility of significant losses.
5. Partner With an Independent Financial Advisor
Choose an independent financial advisor that offers custom HSA investment strategy planning. The advisor can offer holistic financial planning to help you use your account to save for retirement.
Using your HSA as an investment vehicle can help you earn thousands or millions of dollars for retirement. Your account can provide a superior choice over other retirement options if you manage it properly.
Common Pitfalls of Using a Health Savings Account
You need to account for potential issues that can arise during retirement as you craft your HSA investment strategy. This ensures you can still use your account funds without compromising your ability to save as much as possible for retirement.
There are many reasons to use an HSA to save for retirement, but no retirement savings plan is perfect. The disadvantages of health savings accounts include:
- Since a health savings account is a high-deductible health plan, it can put a more significant financial burden on you than other types of health insurance.
- Those who are committed to using their HSAs to save for retirement may forgo medical care, even though doing so can put their health in danger.
- Withdrawal of health savings account funds for non-qualified expenses before the age of 65 will require you to pay taxes on these funds, along with a 20% penalty. People over the age of 65 will still have to pay taxes on any withdrawals for non-qualified expenses without the 20% penalty.
- Record-keeping is required, so you can verify that any account funds you use are applied to qualified medical expenses.
- Certain health savings accounts charge maintenance or per-transaction fees.
Weigh the pros and cons of health savings accounts closely. You can also work with an independent financial advisor that can evaluate your account in relation to your retirement goals and help you plan accordingly.
Contact an Expert With Questions About Building a Successful HSA Investment Strategy
Health savings accounts are a misunderstood tool to save for retirement. The independent financial advisors at Bogart Wealth can help you use this benefit to reach your retirement goals.
Our diverse team of financial professionals is available to outline our retirement planning services and how they can improve your financial outlook. Contact Bogart Wealth today to discuss your wealth management needs.