Health Savings Accounts (HSAs) haven’t gotten anywhere near the amount of press—nor the attention from workers—that their advocates believe they deserve. That could be because workers really don’t understand HSAs nor are they aware of the multiple tax benefits that such accounts can provide—and that’s on top of their primary purpose: offering a means of saving to cope with steadily increasing health care costs.
Coupled with high-deductible health plans, HSAs offer employees the opportunity to set money aside to pay those high deductibles, as well as to save even more to pay other out-of-pocket medical expenses not covered by the health plan.
Workers often don’t save much more than the minimum; in fact, a recent study found that not even one percent of respondents maxed out allowable HSA contributions. That means they failed to capitalize on the many other advantages that HSAs offer. That could be because they confuse the rules governing HSAs with those governing flexible spending accounts—which have “use-it-or-lose-it” rules that don’t apply to HSAs—and are afraid of losing any additional funds they might save over the minimum.
However there are plenty more benefits to be had from an HSA, over and above its help with health care expenses.
Here’s a look at seven benefits to be had from using HSAs to the max:
1. Contributions to HSAs are deductible from gross income. In fact, if they’re made via payroll deduction, they’re pretax—which means you don’t have to sit around and wait for a refund. And considering that the 2017 maximum allowable contribution is $3,400 for individuals or $6,750 for families (those over 55 can add an additional $1,000 to those amounts), that can mean your tax bill could take a substantial hit.
2. HSA money rolls over from year to year. Unlike an FSA, an HSA is not subject to “use-it-or-lose-it” rules, which means the money you save inside an HSA can grow, literally, for years if you save more than you need for qualified health care expenses within a given year. This is a great thing for multiple reasons.
3. Interest on HSA money is tax free. That’s right—the money you save inside an HSA isn’t subject to taxes as long as it’s in there. While many people just put the money away and don’t think about it until they need to take it out to pay some qualified health care expense, it’s just sitting there earning interest—on which the accountholder does not need to pay taxes.
4. Money invested inside an HSA also grows tax free. This can be a really big one. Lots of people aren’t even aware that if their balance is large enough, they can invest the money inside an HSA, rather than just save it. And since investment returns grow just as tax-free within an HSA as interest does, that means you could have a sizeable balance accumulating against possible future needs.
5. Prior to age 65, money withdrawn from an HSA that is not used to pay qualified medical expenses is subject to a 20% penalty plus normal income taxes. At age 65, withdrawal penalties go away even if you take the money out for a nonqualified medical expense. You’ll still have to pay taxes, unless what you’re spending the money on is a bona fide qualified medical expense, but no more penalty.
6. You can use the money in an HSA to pay for long-term care. While many seniors are trying to figure out how they might be able to cover the costs of long-term care, few have thought of using the money in an HSA to do it. But that’s an option, particularly if you have a family history that implies a future need for such care.
7. You can use the money in an HSA to supplement a 401(k). So maybe your 401(k) took a hit (or two) during some market turbulence, and you don’t have as much set aside for retirement as you’d like. If you have a good balance in your HSA, that could be your key to a more comfortable retirement. If the money isn’t needed for qualified medical expenses, and you’re past the age of 65, remember that you can take it out, without penalty, and just pay the income tax. It ends up working in much the same way as a tax-deferred situation from a regular retirement account.
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