If you are a young person starting out on your own for the first time, or someone who is looking to save more for retirement, you may have heard about something called a Health Savings Account or HSA. An HSA can be provided by an employer or you can sign up by yourself. In this article, I will detail the advantages, uses, and cautions regarding Health Savings Accounts.
HSA accounts are triple tax-deferred. This means, your money is not taxed when it goes in, as it grows, or when you take it out, provided you use it for medical purposes. HSA’s can also be an investment account, you can set contributions to be invested allowing them to grow over time. If you max your individual contribution from 21 to 65 at an 8% average growth rate, you could get $1.2 million at retirement provided you do not withdraw from the account during that time. Using this method would allow you to have a nice nest egg for medical expenses in your later years. You can also use an HSA for other nonqualified expenses, but you will pay income tax on those expenses.
HSAs can be used for all kinds of things throughout your life including, doctor office copays, insurance deductibles, dental, vision care, medicine, hearing aids, retirement homes, nursing care, and more. AS it reduces your taxable income and the funds are not taxed upon deposit, growth, or distribution. HSA’s are far more effective for paying medical expenses than paying out of pocket.
Health Savings Accounts work best if you contribute regularly, let it grow, and avoid taking money out early. If you must use the funds before retirement, only use for qualified medical expenses, otherwise you could be paying an extra 20% penalty on top of regular income tax. Keep in mind, you can only contribute to an HSA until you are 65, so maximize your contributions early.