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Open enrollment season is upon us, which means millions of Americans are sorting among the various health plans on offer through their employer to decide which one best fits their needs.
A number of data points factor into this calculus, including premiums, deductibles, your anticipated health-care costs and whether insurers have providers you like in their networks. It’s a deeply personal decision that no stranger on the internet can make for you.
But as you’re considering your options, financial advisors would like to make sure that you’re taking one crucial financial tool into account.
If your employer offers a high-deductible health plan (those with deductibles of at least $1,500 for individuals or $3,000 for families), those who enroll in it gain access to a health savings account.
Like a flexible spending account, an HSA is funded through pre-tax dollars and can be used to cover medical costs throughout the year. Unlike an FSA, though, the money doesn’t have a “use it or lose it” provision. Rather, the funds sit in an account you own and can take with you should you switch jobs.
Some 81% of accountholders keep HSA money in cash, according to a recent survey from the Plan Sponsor Council of America. But if you use that money to invest, the HSA’s unique advantages as a retirement savings vehicle come to the fore.
“An HSA is indeed one of the most powerful, yet underutilized, financial tools available, especially considering its unique triple tax advantage — contributions are tax-deductible, growth is tax-free and withdrawals for qualified medical expenses are also tax-free,” says Sean Lovison, a certified financial planner and founder of Purpose Built Financial Services in Moorestown, New Jersey.
“This feature positions HSAs not just as a tool for current medical expenses, but as a strategic component in long-term financial planning.”
Here’s how an HSA’s three-pronged tax benefit works: As with an FSA, the money you put into an HSA counts against your taxable income for the year in which you make the contribution. But unlike an FSA, you can invest in an HSA the same way you would a brokerage account, say, by buying a portfolio of mutual funds or exchange-traded funds.
Investments you hold in the account grow tax-free, and you can withdraw funds from the account at any time, without owing income tax or penalties, provided you use the money for qualified medical expenses.
In 2023, you can contribute up to $3,850 to an HSA as an individual and up to $7,750 if you receive family coverage. To maximize your HSA’s potential as a retirement savings vehicle, financial advisors recommend contributing as much as you can. Keep enough cash on hand in the account to cover your annual deductible and invest whatever’s left over.
Under this convention, you’d pay for medical expenses out of pocket in the short-term in order to reap the benefits of long-term compounding growth. That means that this strategy is best suited for someone with low health-care expenses and plenty of cash on hand to cover an emergency medical bill.
But good things come to those who can afford to wait. For one thing, there’s very little doubt that you’ll need the money to fund your health care in retirement. A single person aged 65 in 2023 can expect to spend $157,500 on health care in retirement, according to estimates from Fidelity.
And importantly, the medical expenses you withdraw money from your HSA for don’t have to be contemporaneous. As long as you keep your receipts for medical expenses along the way, you can reimburse yourself from your HSA at any time without paying tax or a penalty.
“For folks who are in good health, making annual contributions and not using [their] HSA to pay for [medical expenses] creates multiple benefits,” says Michelle Fait, a CFP and founder of Satori Financial in Seattle, Washington.
Not only do you build up a stash of cash for future medical expenses, she says, but “by also hanging onto your receipts for medical costs, you can take out HSA funds up to the total of your receipts (or max in the HSA) at any time with no tax cost.”
Say you have $100,000 in your HSA and want to take a $20,000 vacation. Provided you have $20,000 worth of receipts for qualified medical expenses you’ve racked up over the years, you can withdraw from your HSA at any time and set sail tax-free.
Just because an HSA offers a tax-efficient way to save for health-care expenses in retirement doesn’t mean that the account, or the insurance plan it’s tied to, is right for you.
Despite the attractive benefits, don’t let the tail wag the dog when it comes to choosing an insurance plan, says Ashley Rittershaus, a CFP and founder of Curious Crow Financial Planning in Revere, Massachusetts.
“Enroll in the best-fit health insurance plan for your specific situation, taking into consideration your expected medical expenses, premiums, deductibles, out-of-pocket maximums and insurance coverage,” she says.
If you have consistently high health-care costs and a tight budget, for instance, a high-deductible plan may not be for you.
Furthermore, consider whether an HSA investing strategy would impact you psychologically.
“Will you be less likely to seek medical care if you know you’ll have to pay out of pocket? I believe your health is more important than any financial benefit, so if the answer to that question is yes, a traditional health plan might be the better option for you,” Rittershaus says.
If you find that a high-deductible plan makes sense, but you don’t have the means to invest the money right now, that’s fine too, financial pros say. At the very least, you’re getting a tax break on money you set aside for medical expenses, the same as you would in an FSA.
“The most powerful attribute of an HSA isn’t necessarily just the economics. It’s the flexibility that you have,” says Kevin Robertson, executive managing director at HSA Bank.
Depending on your circumstances, he says, there will likely be years when you have to spend and others when you’re able to save. “The flexibility that an HSA can bring to that person is really where the secret lies.”
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