Your HSA isn’t a savings account, it’s an investment account, and you can make a serious nest egg out of it
It’s hard enough to get motivated to save for retirement, but saving for your future medical bills? How responsible should a person be?
Fortunately, health savings accounts, or HSA, are tools that make saving for future health-related expenses less painful. These accounts save you money, but they also allow you to invest. With the arrival of open registrations, an HSA might be something to consider.
“A cool tip is to invest money in an HSA like you invest in your IRASaid Victor Medina, certified financial planner and founder of Palante Wealth Advisors in Pennington, New Jersey, in an email interview.
Investing through an HSA
Think of your HSA as a home for your medical dollars. Just like a brokerage account or an IRA, you will need to put money into the account before you buy any investments. Then, after you fund the account, you can start investing.
Some HSAs offer tools that help you choose your investments and allow automatic rebalancing, so your portfolio stays in your preferred allocation. Others allow you to choose from specific investments, such as stocks, bonds, mutual funds, and ETFs.
Whichever method you choose, investing your money through an HSA will likely allow it to grow faster than saving on its own. However, if your HSA is offered by an employer, you may have fewer options for investing your money.
Benefit from the triple tax advantage
Once you start investing through your HSA, you can start to reap the rewards – one of the biggest being the triple tax advantage, Medina said.
“Another cool tip is that the accounts are triple tax-efficient, which means contributions are tax deductible, growth is tax-free, and distributions are tax-exempt when used for medical expenses.” eligible. Plus, unlike a 401 (k) or IRA, you don’t have to deduct any money from the account at a certain age.
If you invest in your HSA for the long term, this tax-free growth can make a significant difference in the amount of money you keep.
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Prepare for long-term care
According to data from insurance company Genworth Financial, the median annual cost of a home health aide in 2020 was $ 54,912; a private room in a nursing home costs approximately $ 105,850 per year. Thinking about getting older can be difficult for many reasons, including the financial burden that can accompany aging. But investing in an HSA can allow you to prepare for these expenses ahead of time.
If you invested $ 200 in an HSA each month starting at age 30 and getting the standard 10% annual return of the stock market, at age 70 you could have almost $ 1.3 million – a big nest egg for your golden years.
And while it can be tempting to use your HSA money along the way, Faron Daugs, CFP and CEO of Harrison Wallace Financial Group in Libertyville, Illinois, often advises against this.
âWith clients who generally work and still earn a living, if they are eligible to contribute, I often encourage them not to use these funds on an annual basis, so let them sit and grow almost like you would. in an IRA, âsays Daugs.
Pay yourself back later
If you can avoid withdrawing HSA funds as you go, you can reap the benefits later.
âAnother cool trick is to wait much later in life to receive distributions from the account,â Medina said in an email. âYou don’t have to repay yourself the same year. You are only limited to reimbursing yourself for expenses that occur after the account opening date. So you can put money into the account, let it grow for decades, and then receive a lump sum distribution in the future that would put money in your pocket tax-free. Make sure you keep receipts for what you paid out of pocket for medical bills.
Unlike Flexible Spending Accounts, or FSAs, which require you to spend the money within a specific time frame or lose it, HSAs can roll over from year to year.
Learn more about HSAs here.
Hack your IRA
According to Daugs, HSAs have a little trick up their sleeve to help people who haven’t saved a lot of money: you can roll over as much of your money as possible. annual HSA contribution limit for that year ($ 3,600 for individuals in 2021) from a Traditional or Roth IRA in your HSA.
âIt’s available once in your lifetime,â says Daugs. âSo let’s use the current example of $ 3,600. So if you had money in an IRA that was deductible and the money became taxable in that IRA, you can take up to $ 3,600 from that IRA, just once in your life, and transfer it. in an HSA account.
The IRA to HSA rollover is a great trick you can use if you have unforeseen medical expenses and your HSA isn’t as big as you would like.
Read also : Does your 401 (k) have to follow your conscience? What to know before investing in ESG.
And while HSAs have many benefits, they aren’t for everyone. Since participants must subscribe to a high deductible plan to have an HSA, this can be a headache for some. Choosing a health plan during open enrollment will depend on your situation and the options available to you.
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Alana Benson writes for NerdWallet. Email: [email protected]