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Financial Wellness • Forbes

How to Maximize the Value of Your Health Savings Account

By Robert Farrington | 4-min read

Healthcare in the U.S. can be insanely expensive no matter how healthy you are, yet having health insurance doesn’t always help with long-term costs. After all, the lowest tier of health insurance plans — which are referred to as “Bronze” plans — only cover 60% of healthcare expenses, according to Healthcare.gov. Plus, health insurance plans in 2019 come with a maximum out-of-pocket limit of $7,900 for individuals and $15,800 for families. For most people, that’s a ton of money to fork over before insurance kicks in to cover the rest.

But, there’s at least one way to save money on the rising costs of healthcare — and that’s by opening a Health Savings Account, or HSA. This type of account lets you save tax-advantaged dollars for future healthcare expenses, and you don’t have to pay taxes on distributions when you take money out to cover qualifying healthcare bills.

Who Can Use A Health Savings Account?

To get the most out of a health savings account, you need to understand how they work. It all starts with the fact that there are limits to how much you can contribute each year, as well as rules that govern the type of health insurance plan you need to have to use an HSA at all.

Contribution limits go up each year to account for inflation and rising costs. For 2019, the HSA contribution limits for individuals with qualifying healthcare plans is $3,500, up from $3,450 in 2018. Families, on the other hand, can stash away $7,000 in a health savings account instead of the $6,900 they could contribute in 2018. If you’re ages 55 and older, you can also contribute another $1,000 to your plan using what is known as a “catch up contribution.”

To use an HSA, your health insurance plan must also meet specific requirements. For example, individuals must choose plans with a minimum annual deductible of $1,350 and a maximum out-of-pocket amount of $6,750 in 2019.

Families need to choose plans with a minimum annual deductible of $2,700 and a maximum out-of-pocket amount of $13,500.

Due to these very specific requirements, not all healthcare plans qualify for a health savings account. And if you’re eager to use one to save for future healthcare expenses, you’ll want to keep that in mind when you select a health insurance plan.

The Benefits of an HSA

While saving for future expenses can help you gain peace of mind, the main perk you’ll get with a health savings account is tax savings. This is based on the fact you can deduct contributions to your health savings account each year up to annual limits. In other words, contributing to an HSA will directly reduce the amount of your taxable income.

Not only that, but money in your HSA can grow tax-free for as long as you keep it in your account. And when you need to take money out to cover qualifying healthcare expenses, you won’t have to pay income taxes on your distributions.

To sum things up, health savings accounts benefit you in three main ways — they let you save for healthcare expenses while reducing your taxable income, your money grows tax-free, then you don’t have to pay income taxes when you take the money out to cover medical bills.

How to Use Your HSA to Fund Your Retirement

This trifecta of tax savings is the main reason many financially savvy families fund their health savings accounts whether they think they’ll need the money or not. Because you can take distributions from your health savings account at age 65 with no penalty (and no tax liability), more and more people are using them to fund their retirement goals.

Think about it — you get to contribute up to annual limits every year and reduce your taxable income in the process. From there, your money grows tax-free.

If you’re able to keep your HSA funds in your account until age 65, the IRS no longer requires you to use the money for qualifying healthcare expenses. At that point, you can use your savings to supplement your retirement income.

This is part of the reason Forbes contributor John Goodman says that “no other savings vehicle can top an HSA.”

Your health savings account is even better than your 401(k), your IRA, and even a Roth IRA, he says, due to the triple tax savings and fact you can save your money until age 65 and then use it however you want.

Making the Most Out of a Health Savings Account

The obvious way to maximize a health savings account is by contributing as much as the law allows every single year. Ideally, you’ll also leave your funds in your HSA to grow for as long as you can — even if that means covering healthcare expenses with other money you have. Since your HSA funds can grow tax-free and distributions will eventually be tax-free, there’s a huge incentive to save the maximum and leave your HSA alone.

Also note that you can maximize your earnings by choosing the right health savings account to begin with. There are a ton of health savings accounts to choose from with varying investment options and ongoing costs.

As an example, both Fidelity and Lively offer great HSA options, because they come with first dollar investing with no minimum balance required. They also allow you to invest in a variety of investment products – some which can be commission free.

If you decide to set up your own HSA account, make sure to look for a provider that comes with low fees and several investment options to choose from. By making sure your HSA dollars are invested for the long-term with minimal fees, you can receive an even greater return on your savings over time.

The Bottom Line

There’s nothing most of us can do about rising healthcare costs, other than shopping around for health insurance plans each year and hoping for the best. But we all have some control over how we save for upcoming costs — and how we put that money to use.

A health savings account is the smartest vehicle to use for future healthcare expenses, although you’ll need to be careful about selecting a qualifying healthcare plan if you hope to contribute.

And, if you’re one of the lucky ones and you don’t have any huge medical bills before you qualify for Medicare, you may even get to withdraw your HSA funds tax-free and use them in retirement. When it comes to tax-advantaged savings accounts, it doesn’t get any better than that.

 

This article was written by Robert Farrington from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

The views of the author of this article do not necessarily represent the views of Gradifi. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Readers should consult their own attorneys or other tax or financial advisors to understand the tax, financial and legal consequences of any strategies mentioned in this article.