A Health Savings Account (HSA) is a powerful financial tool offering triple tax advantages—a rare benefit in savings and investments. Contributions are tax-deductible, growth is tax-deferred, and qualified medical withdrawals are tax-free. These unique benefits make HSAs valuable for healthcare savings and retirement planning.
Here are the top strategies to maximize your HSA benefits and secure long-term financial success.
1. Max Out HSA Contributions for Maximum Tax Savings
Maximizing your HSA contributions is essential for taking full advantage of the tax savings it offers. In 2024, the contribution limits are $4,150 for individuals and $8,300 for families. According to the Employee Benefit Research Institute (EBRI), average contributions to HSA accounts are far under the maximum. Maxing out on contributions doesn't only mean tax savings in present years, it also means more seed for your funds to grow for the future.
2. Invest HSA Funds for Tax-Free Growth
An often overlooked feature of HSAs is the ability to invest the funds for tax-free growth. According to EBRI, only 13% of account holder invest their HSA funds, missing out on the potential for their HSA investments to grow. For example, investing $8,300 annually with a 7% return* could lead to more than $100,000 in just 10 years.
*Hypothetical return for a diversified equity portfolio. Your return could vary.
3. HSA: Don’t Clear Out by Year End
Unlike a Flexible Spending Account (FSA), HSA funds roll over year after year, allowing your balance to grow without the pressure to spend it by year-end. This is a significant benefit; you don’t lose unused funds in an HSA.
4. Pay Out-of-Pocket for Medical Expenses to Maximize HSA Growth
Paying for your medical expenses out of pocket and allowing your HSA balance to compound over time is a smart long-term strategy. This helps maximize the tax-free growth potential of your investments. That said, if your financial picture doesn't allow you to pay for your medical expenses out of pocket, HSA will be a great second choice.
5. Use Your HSA for Medicare Premiums in Retirement
Once you reach age 65, you can use your HSA to pay for Medicare premiums, deductibles, and other medical expenses without paying any taxes. This makes it a valuable asset during retirement. Even non-medical withdrawals no longer incur penalties, although they will be taxed like regular income.
6. Take Advantage of the IRS Last-Month Rule for HSA Contributions
If you become eligible for an HSA mid-year, you might think you’re limited to a partial contribution. However, the IRS’s last-month rule allows you to contribute the full annual amount if you’re eligible in the final month of the year, as long as you remain eligible in the 12 months after.
7. Treat Your HSA Like a Retirement Account
After turning 65, your HSA can act as a supplemental retirement account. You can withdraw funds for non-medical expenses without a penalty, similar to an IRA, although non-medical withdrawals are still subject to income tax. This flexibility makes the HSA a versatile tool for long-term savings.
8. Know Who You Can Pay Medical Expenses For
It’s important to know that you can only use HSA funds for medical expenses incurred by yourself, your spouse, and your IRS-qualified dependents. Using HSA funds for non-qualified dependents may result in penalties.
Disclosure:
All written content on this site is for informational purposes only.Opinions expresses herein are solely those of Savor Financial, a Core Planning brand.All information and ideas should be discussed in detail with your individual advisor prior to implementation. Investment advisory services are offered through Core Planning, LLC.The presence of this website on the internet shall in no direct or indirect way be construed or interpreted as a solicitation to sell or offer to sell investment advisory services.The information contained here is general in nature and is not intended as legal, tax, or investment advice. Further, the information contained herein may not be applicable to, or suitable for, the individuals’ specific circumstances or needs and may require consideration of other matters.CP does not provide legal advice or drafting services. Estate planning is considered incidental within the context of a financial plan. We will coordinate with your family attorney of choice. CP is not a certified public accountant and does not provide tax filing services. Tax related advising is considered incidental within the context of a financial plan. We will coordinate with your CPA of choice.
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