Health savings accounts (HSAs) are not only a tool for managing healthcare expenses but they can also be a powerful instrument for building wealth. For example, these accounts can offer three different tax advantages: contributions are tax-deductible, earnings grow tax-deferred and withdrawals for qualified medical expenses are tax-free. By contributing the maximum allowable amount each year, you can accumulate significant savings over time. For help creating a long-term financial plan or determining how you can build wealth, consider working with a financial advisor.
How an HSA Works
Health savings accounts (HSAs) are tax-advantaged savings accounts designed specifically for individuals with high-deductible health plans (HDHPs). These accounts help cover out-of-pocket medical expenses while also offering significant tax benefits.
HSAs are designed to cover a wide range of medical expenses, including doctor visits, prescription medications, dental care and even some over-the-counter drugs. You must use the funds for IRS-qualified medical expenses to avoid penalties and taxes. Any withdrawals for non-qualified expenses before age 65 are subject to income taxes and a 20% penalty.
One of the flexible features of an HSA is its rollover capability. Unlike flexible spending accounts (FSAs), HSAs do not have a “use-it-or-lose-it” rule. Any unused funds at the end of the year roll over to the next year, allowing your savings to accumulate. Additionally, HSAs are portable, meaning you own the account, and it stays with you even if you change jobs or health plans.
Benefits of Using an HSA
Health savings accounts offer a unique blend of tax advantages and savings opportunities that can significantly benefit your financial health. Designed for individuals with high-deductible health plans (HDHPs), HSAs are a versatile tool for managing medical expenses and planning for the future. Here are six key benefits of using an HSA:
- Triple tax advantage: HSAs provide a triple tax advantage: contributions are tax-deductible, earnings grow tax-deferred, and withdrawals for qualified medical expenses are also tax-free. This combination can lead to substantial tax savings over time, enhancing your overall financial strategy.
- Long-term savings: Unlike flexible spending accounts (FSAs), HSAs do not have a “use-it-or-lose-it” rule. Any unused funds roll over year after year, allowing you to build a significant savings reserve for future medical expenses or even retirement.
- Investment opportunities: Many HSA providers offer investment options once your account balance reaches a certain threshold. You can invest in mutual funds, stocks or bonds, similar to a 401(k) or IRA, enabling your contributions to grow and increase your wealth over time.
- Flexibility: HSAs are highly flexible and portable. You own the account, and it stays with you even if you change jobs or health plans. This portability ensures that you can continue to benefit from your HSA regardless of your employment situation.
- Tax-free withdrawals for qualifying expenses: This means you can pay for a wide range of healthcare costs, including doctor visits, prescription medications and dental care, without incurring additional tax liabilities.
- Retirement benefits: After age 65, you can use HSA funds for non-medical expenses without a penalty, though they will be subject to ordinary income tax. This feature makes HSAs a valuable supplementary retirement savings tool, offering flexibility and additional financial security in your later years.
Strategies to Use an HSA to Build Wealth
Depending on the strategy, you can maximize the financial benefits of your HSA and use it to enhance your long-term financial health. One of the most effective ways to use an HSA to build wealth is by maximizing your contributions each year. The IRS sets annual contribution limits, and by contributing the maximum amount, you not only reduce your taxable income but also allow more money to grow tax-free in your account.
Instead of letting your HSA funds sit idle, consider investing them in mutual funds, stocks or bonds if your HSA provider offers investment options. Doing this will allow your HSA funds to grow like a retirement account. And the returns on these investments can compound over the years, significantly increasing the value of your HSA and contributing to your overall wealth.
You can keep this account well into retirement to help fund some of your needs in your golden years. After age 65, you can withdraw HSA funds for non-medical expenses without a penalty, though these withdrawals will be subject to ordinary income tax. This feature makes HSAs similar to traditional retirement accounts like IRAs or 401(k)s.
Bottom Line
Leveraging an HSA to build wealth can help you stretch your retirement savings and pay for qualifying medical expenses. Consulting with a financial advisor can help you optimize your HSA strategy so that it aligns with your broader financial goals and enhances your overall wealth-building efforts.
Tips for Building Wealth
- A financial advisor can guide you in building a long-term financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When you’re looking to build wealth it’s important to know what type of investment portfolio and risk profile fits your needs. Consider using an asset allocation calculator to see what might be a fit for your portfolio.
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