Healthcare is a major burden for working Americans and seniors alike. Thankfully, there are tax-advantaged savings tools that can help workers set aside funds to cover both immediate and long-term medical expenses, like flexible spending accounts (FSAs) and health savings accounts (HSAs). But new data from Bank of America’s 2019 Workplace Benefits Report reveals that today’s employees are woefully underinformed with regard to the latter. In fact, only 11% could correctly identify the following four HSA attributes.
1. HSAs Are Triple Tax-Advantaged
If you’re in the habit of setting funds aside for your golden years, then you may be familiar with the concept of tax-advantaged savings. Retirement savings plans like IRAs and 401(k)s offer key tax benefits that make it easier to sock away money for the future. Traditional IRAs and 401(k)s, for example, offer tax-free contributions, but withdrawals in retirement are taxed. Roth IRAs and 401(k)s don’t offer an immediate tax break for making contributions, but they do offer tax-free growth on investments and tax-free withdrawals during retirement.
HSAs, on the other hand, are triple tax-advantaged: The money you contribute goes in tax-free, investment gains are tax-free, and withdrawals are tax-free provided they’re used for qualified medical expenses. That makes them an extremely valuable savings tool.
2. HSA Funds Can Be Invested
When you put money into an FSA, you can’t invest the funds you’re not using. HSAs, on the other hand, let you invest your money for added growth, thereby letting you accumulate wealth in your account over time.
3. HSA Funds Don’t Expire
If you’ve ever saved in an FSA, you’re no doubt aware that the money you put in must be used up by the time your plan year comes to a close, or else you risk forfeiting your balance. HSAs work differently. The money in your HSA doesn’t have to be used up year after year. In fact, the whole point of an HSA is to put in more money than you expect to use in a given year, invest the difference, and keep carrying that balance forward. That way, once you retire and move over to a fixed income, you’ll have a dedicated source of funds for healthcare expenses.
4. HSA Eligibility Hinges on Having a High-Deductible Health Plan
Not everyone qualifies to participate in an HSA. To fund one, you must be on a high-deductible health insurance plan. The current definition of that is a deductible of $1,350 or more if you’re funding that account for yourself only, or $2,700 or more if you’re funding an HSA on behalf of your family. Eligibility also hinges on having an out-of-pocket maximum of $6,750 for individual coverage or $13,500 for family coverage.
It Pays to Fund an HSA
Some people who are eligible for HSAs don’t participate, or don’t max out their contributions, because they don’t fully understand how these plans work. But if you pass up the opportunity to capitalize on an HSA, you might really regret it in the future, especially when you see how expensive healthcare can be in retirement.
Currently, you can contribute up to $3,500 per year to an HSA as an individual, and up to $7,000 for a family. If you’re 55 or older, you can put in an extra $1,000 on top of whichever limit applies to you. Also, know this: Sometimes employers fund HSAs on their employees’ behalf, so see if that’s a benefit you’re entitled to. Though the sum your employer puts in will count toward your annual limit, it’s effectively free money to help you tackle the potentially monstrous cost that is healthcare, both now and in the future.
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.