Maximize Tax Savings With an HSA During Open Enrollment

The hottest employee investment benefit – boasting $98.0 billion in assets held in over 32 million accounts – is one that only 7% actually take advantage of and benefit from. Perhaps the name is misleading, or employees are just overwhelmed.

It’s open enrollment season for benefits within many organizations. You’re bombarded with health insurance information, investment options, and other benefits. As you scroll through your benefit options, you might come across a health insurance option that also provides a Health Savings Account (HSA).

An HSA is not your average savings account. It operates more as an investment account when used to its full potential and can result in tremendous tax savings benefits. The tax benefits are even more appealing than a 401(k) or Individual Retirement Account (IRA).

A Health Savings Account?

According to the IRS website, a Health Savings Account (HSA) is:

“…a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.”

So what does this mean in plain English? The intended purpose of an HSA is to pay for medical expenses tax-free. However, an HSA also allows you to invest money in stocks or other funds, similar to investing in a 401(k) or individual retirement account (IRA). That money is then available to use for qualified medical expenses.

The tax benefits of an HSA are significant. When HSA dollars are used for qualified medical expenses, the tax benefits are better than a 401(k) or IRA. With a 401(k) or IRA, you have to choose if you’d prefer your dollars to be taxed upfront (Roth) or on the back end (Traditional).

HSAs provide triple-tax benefits, which means you can invest in your HSA with pre-tax dollars, grow those dollars tax-free, and withdraw tax-free when used for qualified medical expenses.

With an HSA, you can fund up to $7,750 (for a family filing jointly) or $3,850 (for an individual) in 2023. However, HSAs are typically only available with a higher deductible and lower premium health insurance plans.

Maximize The Benefits

You may be wondering, if I have a higher deductible plan and therefore have to pay more money out of pocket, how will the investments in my HSA ever grow?

The answer is to leverage other savings to pay for medical expenses throughout the year while you invest the money in your HSA account.

For example, if you receive a medical bill for $1,200, one option is to pay that bill using money already in your HSA. However, you can pay that bill from a regular savings account outside your HSA designated for medical bills. Since you aren’t pulling that $1,200 out of your HSA, it can continue to grow tax-free for decades until retirement.

Additionally, if you saved the $1,200 receipt, you can pull that money out of the HSA tax-free at any point. Of course, if you pull out sooner rather than later, you’ll miss out on the growth over the years, but it’s still nice to have the ability to have access to that money tax-free if necessary. You can save qualified medical expense receipts in something simple such as a Google Drive document.

Let’s say you have $10,000 currently in an HSA. If you have medical receipts totaling $3,000, you could pull that money out any time tax-free and without penalty. Even if you plan to let that money grow for several years, it’s also nice to know you can access that money if needed. It essentially becomes another emergency fund if necessary.

Steps To Set Up Your HSA for Retirement

This is not financial advice. Using an HSA to fund retirement is a personal decision. But if you want to consider it, here are the steps you’ll follow.

• Step 1: Determine if your employer offers an HSA option and enroll if available. If you are self-employed, there are also options as long as you are enrolled in an HSA-compatible health plan.
• Step 2: Fund your HSA account. The maximum annual contribution for 2023 is $7,750 for a family and $3,850 for self-only coverage, and these maximums will likely increase slightly every year or two.
• Step 3: Pay medical expenses out of pocket and invest your HSA funds. Investing your HSA funds for years is the key if you want long-term compound growth. Make sure you take the step to invest your HSA money, or else it will sit in a regular account and not accrue any interest.
• Step 4: Save your receipts for qualified medical expenses. We save all of our receipts in a simple Google Document that can be accessed through Google Drive. Keeping your qualified medical receipts allows you to pull out money any time tax-free (even better though, if you let your money grow over the years).

Once your HSA is set up and you start investing, you can sit back and let your money compound. The hardest part in all of this is paying for your medical bills out of pocket. If you end up going with a high deductible HSA-compatible plan, ensure that you know the maximum annual out-of-pocket totals you could potentially pay in a year. Of course, you’ll also need savings to pay for any medical expenses out of pocket.

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This article was produced by Financial Pilgrimage and syndicated by Wealth of Geeks.