The Health Savings Account (HSA) is one of the best saving and investing tools available, but sadly, only 22 million Americans are taking advantage of this, according to AHIP.
The HSA is a savings and investing account that can be used in conjunction with a high deductible health insurance plan (HDHP). And this is what scares most Americans away—the idea of a high deductible health plan.
However, most Americans shouldn’t be scared. In fact, they should be taking full advantage of the amazing features that an HSA has to offer. Here’s what you need to know about an HSA and the best moves you should be making to take full advantage of it.
How Does An HSA Work?
An HSA is an account, and within that account you can save and invest. In order to qualify for an HSA, you must have a qualifying high deductible health plan and meet some other requirements (such as being enrolled in another health plan, or having a full FSA from your employer). Most health insurance plans that qualify for HSAs advertise it—especially on marketplace exchanges or through your employer.
If you have a qualifying plan, you can contribute up to the HSA Contribution Limits each year. In 2019, the limits are $3,500 for individuals and $7,000 for families. There is also an HSA catch-up contribution of $1,000 if you’re 55 or older (just like an IRA).
With the money in the account, you can save it like a savings account, but you can also invest it.
When you want to withdraw the money, it can be withdrawn tax-free for medical expenses. However, unlike FSAs, there’s no annual limit—so you can leave the money in the account for years (or decades) and withdraw it at some point in the future.
You can also withdraw the money without a penalty in retirement (age 65), and simply pay taxes on it. That makes it function just like a traditional IRA. And even better is that the money can also be used for Medicare premiums tax free as well.
What Makes an HSA the Best Investment Vehicle
I call the HSA the secret IRA. But it’s actually even better than an IRA when you realize that you can contribute more to it each year than an IRA: $7,000 for families in 2019, versus $6,000 in an IRA.
Here’s some of the great perks of the HSA:
- Contributions to the HSA are tax free (just like a traditional IRA)
- The money grows inside the account tax free (just like an IRA)
- You can withdraw the money tax free at any time for qualifying medical expenses
- You can use the money tax free to pay for Medicare premiums or long term care insurance premiums
- You can withdraw the money after age 65 penalty free (just like a traditional IRA)
All of these perks combined make the HSA the best investment vehicle to save for the future. You can likely have most (if not all) of your money tax free into the account and tax free out of the account.
You’re Not Trapped by Your HSA Provider
One of the key ways to leverage an HSA is to invest the money for long-term growth. However, many HSA providers don’t allow investing, or if they do, severely limit the choices or charge excessive fees. But, unlike a 401(k) where you are trapped with the provider your employer chooses, an HSA is flexible. You can move HSA providers anytime, even if you’re currently employed and have an employer-backed HSA.
You can change your HSA provider anytime. The key here is to choose a great HSA provider.
The best HSA providers charge minimal or no fees, and allow you to invest the total balance of your HSA (no keeping a cash balance). They will also make it easy to get your money out of the account, typically providing debit cards and having an easy to use website.
The list of HSA providers is growing.
How to Maximize Your HSA
The key to making the HSA the best investment vehicle is to use it smartly. This means maximizing your contributions, and not withdrawing your funds immediately. To truly maximize your HSA, you need to treat it like an IRA and not touch it for years. This will allow your contributions to grow over time.
If you continually pull money out of your HSA to reimburse your medical expenses, you won’t give your funds enough time to compound with the market.
A better approach, if you can afford it, is to simply max your contribution to your HSA, and pay for healthcare expenses out of pocket. However, save your receipts. I recommend saving them both digitally and in a file called “Expenses to be Reimbursed.” Accurate record keeping is the key to maximizing your HSA.
Now, as time goes on, your HSA will grow into a nice nest egg. When you do need the money, you can tap into it with all the receipts you’ve been saving over time. If you hit retirement, you still can get your money out tax-free through insurance premiums or your receipts. If you run out of receipts, you can always withdraw at your ordinary income tax levels.
But to see this growth requires discipline to not use the funds inside the HSA immediately. Save them. And take full advantage of all the perks the HSA has to offer.