When it comes to saving and managing your money better, tasks like contributing to your 401(k) and building your emergency fund tend to get a lot of attention, but you never seem to hear much about growing your health savings account, or HSA.
Health savings accounts exist to help Americans with high-deductible health insurance plans to pay for medical expenses. Think of them as emergency funds just for medical costs. The great thing about HSAs is that they allow employees to set aside pretax dollars to cover qualifying medical bills.
HSA Benefits and Challenges
With insurance premiums and deductibles constantly on the rise, it’s wise to consider contributing to an HSA or other health savings program if you have the option. You can currently contribute up to $3,400 annually if you’re single and $6,750 annually if you have a family medical plan. If you’re 55 or older, you can contribute an additional $1,000 each year.
One of the biggest downsides to HSAs is that not everyone has access to them. To contribute to one, you must have high-deductible health insurance through your employer.
Although I’m self-employed, I’m on my husband’s medical insurance plan, and when we saw it offered an HSA option, we jumped at the opportunity. Here’s why:
1. Chance to Build a Medical Emergency Fund
As I said, an HSA can be a great emergency fund for your medical expenses. Instead of just having one main emergency fund, I like to have several for specific expenses that I know will pop up sooner or later.
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Contributing to an HSA allows my husband and me to automatically save money for unexpected medical costs before taxes are even taken out of his check.
A few months ago, we had to drive to Tennessee for a funeral. We stayed with some of my husband’s family, and I ended up coming down with strep throat toward the end of the week.
It was the worst feeling ever. I went to the emergency room for treatment, and a few weeks later I received a $2,000 bill from the hospital, even after our insurance had made payments. We refer to that trip as our most expensive visit to Tennessee, but I’m grateful for having our HSA money to cover the high hospital bill.
2. Employer Match
Another reason we always contribute to our HSA is that my husband’s employer matches his contributions each year. For the first year, we put only $500 into the account because that was all we could afford.
Nevertheless, my husband’s job matched that amount, and we ended up with $1,000 in our account for the first year. Free money to pay medical expenses? I’ll take that any day.
3. An Investment Tool
Once your HSA account balance reaches $2,000, you can make additional contributions. Since the annual family contribution limit for 2017 is $6,750, you can invest at least $4,750 if you start contributing to your HSA for the first year.
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You can invest in mutual funds, but make sure to ask your employer about your options when you decide to use your HSA as an investment tool.
This is something my husband and I wanted to start doing before we got hit with my big emergency-room bill from Tennessee. We don’t want to touch our main emergency fund because we’re trying to buy a house next year. As such, it was great to have the HSA.
Moving forward, we don’t really want to touch the money in our HSA and prefer to invest it instead.
4. Tax Benefits
HSAs offer some of the best tax benefits that also motivate us to contribute. For starters, the money you deposit into an HSA is treated as pretax dollars, which means that you can deduct it from your taxable income each year.
Second, when you use your HSA funds to pay for qualified medical expenses, you aren’t taxed either. Third, the investment gains you earn with HSA money such as interest and dividends are tax exempt at a federal level.
5. Retirement Planning
The final reason why HSA makes sense is because it’s going to aid with our retirement plan.
HSA funds roll over each year, so you don’t have to use the money all at once. Healthcare costs are generally higher among retirees and the money set aside will be useful.
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Once you reach the age of 65, you can withdraw HSA funds for any purpose penalty-free. If you want to withdraw HSA funds earlier and avoid the penalty, you can do so as long as you put the money toward a qualifying medical expense, such as surgery, dental expenses, and ER visits. You can read a full list of qualified expenses at the IRS website.
You can also use HSA funds to reimburse yourself for qualified medical expenses you’ve already paid for in the past, as long as they were incurred after your HSA was established, according to HSABank.com.
This means that you can pay all your medical bills in cash during your active working years, hold onto the receipts, then reimburse yourself and get all the money back during your retirement years.
The Bottom Line on HSA Benefits
Clearly, there are many financial benefits that come with contributing to an HSA. It’s unfortunate that the option isn’t open to everyone, but I encourage you to check with your employer and see if they offer an HSA with their high-deductible medical plans. Then, it’s a no brainer to start contributing and reaping all these benefits.