If you've recently been given access to a health savings account (HSA) as part of a high-deductible health insurance plan, you may be excited about finally having a dedicated account for healthcare expenses that doesn't require you to spend (or forfeit) funds before the end of the plan year. However, the HSA is more than a glorified flexible spending account, and may actually be able to supplement your income in retirement. Read on to learn more about some of the unique benefits of an HSA and the factors you'll want to consider when deciding how to allocate these funds.
What makes an HSA different from other retirement and medical savings accounts?
An HSA is not classified as a retirement account, but many use it that way because of its tax-free status and the ability to roll funds over indefinitely. Because HSA contributions are taken from your paycheck pre-tax and no tax is assessed when funds are spent on qualified medical expenses, it holds an edge over both 401(k)s and IRAs, which require taxes to be paid on all withdrawals and may impose a penalty if funds are withdrawn before you reach retirement age. HSAs can be invested in the stock market just like other retirement accounts, and their tax-favorable status also means you'll never pay any taxes on the investment gains you realize.
HSAs do have some restrictions it's important to note -- if the funds aren't spent on qualified medical expenses, you may be required to pay taxes and a penalty, and you're not able to use these funds to pay your health insurance premiums.
Should you save or spend your HSA funds?
Because the HSA doesn't have a "use it or lose it" requirement like many flexible spending accounts, there's no need to use up your HSA funds within the calendar or insurance year. However, there are still a few situations in which it's wiser to use these funds than pay medical expenses out of your cash flow.
First, you'll want to ensure you're maxing your other tax-deferred retirement options (like a 401(k) or IRA) prior to using the HSA as an investment vehicle. This will ensure you're paying as little in taxes as possible and not leaving money on the table by waiving a 401(k) match.
If you're planning to pay medical expenses out of pocket, you'll also want to make sure you're able to keep clear documentation of the expenses assessed and how much you spend -- this will allow you to withdraw tax-free HSA funds to reimburse yourself at a later date. For more information, contact a business such as Family Financial Partners.