Are you taking full advantage of your Health Savings Account (HSA)? If you’re eligible for an HSA and are not maximizing it, you’re missing out on some big-time tax benefits. HSA accounts are available to anyone with high-deductible health insurance plans ($1,350 deductible for an individual or $2,700 for a family). Most insurance companies offer them, but if for some reason yours does not, setting one up with your financial institution is generally a straightforward process.
So, what’s all the rage about these HSA accounts, anyway? Well, if used correctly, they can save you a fortune in taxes. This is because HSA contributions are made with pre-tax dollars (lowering your total taxable income) where they grow and can be withdrawn tax-free for qualifying healthcare expenses. Not bad, right? In fact, investing in an HSA can be more advantageous than a 401(k) or IRA if you aren’t receiving matching. (1,2)
So now that I’ve got your attention, let’s get into the different ways you can take full advantage of your HSA.
The maximum allowed contribution in 2018 is $3,450 for individuals and $6,900 for families (plus an extra $1,000 for those over age 55). Yet a 2017 study by Fidelity stated that, on average, those with HSAs contributed less than half of the maximum amount. (3) That’s a lot of tax savings being left on the table. Of course, you don’t want to contribute more than you can comfortably afford. If you need (key word: need) money to pay expenses now, it doesn’t make sense to live an uncomfortable lifestyle just to be able to max out your HSA. The key is balancing current needs with future ones.
Don’t Pull Out Funds If Possible
Unless you are a high-income household, this may be easier said than done—but if you are able to pay for medical expenses out of pocket and leave your HSA account untouched, you’ll have created the ultimate retirement account. Your contributions go in tax-free, grow tax-free, and can be taken out tax-free (for medical expenses). You don’t even have to pay FICA taxes as you do with IRA or 401(k) contributions. And after you reach retirement age, you can begin withdrawing for non-medical expenses (taxed at your marginal tax bracket). Again, not everyone can afford to pay for medical expenses out of pocket. Just do what you can do—but if you can swing it, you’re looking at some significant benefits.
Invest Your HSA Account Wisely
Making contributions to your HSA is only the first step. In order to take full advantage of your account, you should further diversify these contributions into other investment funds. This growth-maximizing step is one that is often overlooked. In fact, in 2017, 46% of HSA contributors reported not realizing their contributions could be invested into mutual funds and other investment devices.3
Also, keep in mind that not all HSA accounts are created equal. Some offer better investment options than others. Thankfully, if your employer-provided plan has limited investment options, it’s possible to “shop around” for HSAs and move funds from one account to another. However, due to certain IRS rules, this can sometimes be a complicated process, so it’s always a good idea to consult with a professional before making any big decisions.
As you can see, despite the huge benefits of opening and investing in an HSA account, most people aren’t taking full advantage of them. This is largely due to a lack of education on how to leverage the accounts for maximal results. So, if you are interested in learning how to incorporate powerful HSA tax-reducing strategies into your financial plan, email us at email@example.com or call 610.727.3960 to schedule a meeting.
Vincent R. Barbera, CFP®, MSFS is a managing partner and co-founder of Newbridge Wealth Management, a private financial counseling firm located in Berwyn, Pennsylvania. Believing in a patient, disciplined approach to investment management that delivers value and peace of mind, he utilizes a process-driven approach to financial planning that provides comfort and clarity to his clients’ long-term goals. Along with a bachelor’s degree in psychology and business, he has a master’s degree in business and financial planning and Certified Financial Planner™ designation. Learn more by connecting with Vincent on LinkedIn, or send him questions at firstname.lastname@example.org.