An HSA can help you stretch your health care dollars and build your retirement savings at the same time, as long as you’re eligible for one and you spend the money in your HSA on eligible expenses.
Here’s a look at the benefits of HSAs and tips for opening one:
1. HSAs are tax-free
Putting money in a health savings account is one of the very few ways you can entirely avoid paying any taxes on your money — ever.
Money in tax-advantaged accounts like 401(k)s and individual retirement accounts (IRAs) might grow tax-free, but you will pay taxes on at least the principal at some point.
With an HSA, though, you get a tax deduction for the money you put into the account. Then, the earnings grow tax-free. And, as long as you use it for qualified health care expenses, you don’t pay taxes on the money you withdraw from the account. It’s truly tax-free.
2. HSAs are more versatile than FSAs
A health flexible spending account (FSA) is another type of tax-advantaged account for stretching health care dollars, but it has a big downside.
FSAs are subject to a use-or-lose provision. That means workers generally must spend any money in their FSAs within their health insurance plan year or else lose the money.
With an HSA, however, your money remains in the account — and thus can grow — year after year.
3. You can invest the money in your HSA
It’s generally possible to invest the money that’s in your HSA so it can grow faster, though investment options may vary depending on where you open your HSA.
I invest a portion of my HSA in an all-market index fund to help me better reach my goal of using my HSA as a supplemental retirement account.
Author: Miranda Marquit