The Best Savings Tool You Should Be Using

If you're one of my clients then you've probably heard me extoll the virtues of the Health Savings Account (HSA). It's my favorite wealth-building tool and you should be adding it to your retirement portfolio. An HSA is a tax-advantaged savings account that is designed to help people pay for medical expenses. If you have a high-deductible health insurance plan, you are eligible to open an HSA without permission from your employer. In my opinion, this is the single best savings tool that you can use to not only save for future medical bills, but lower your tax liability and grow your wealth.

Let's explore some of the most significant tax and financial benefits of opening an HSA:

Tax Deductible Contributions

One of the most significant benefits of an HSA is that contributions are tax-deductible. This means that you can deduct the amount of your contribution to your HSA from your taxable income, which reduces your overall tax liability. For 2023, individuals can contribute up to $3,850, while families can contribute up to $7,750 to their HSAs.

Tax-Free Earnings

Much like IRAs and other retirement accounts, the money you contribute to your HSA can be invested and grow tax-free. This means that you don't have to pay taxes on the earnings you make on your HSA investments, which can help your savings grow more quickly. Additionally, the money you withdraw from your HSA to pay for qualified medical expenses is tax-free.

Flexibility

Health Savings Accounts give account holders ample flexibility in how they use their savings. You can use the funds in your HSA to pay for qualified medical expenses, such as deductibles, copayments, prescriptions, and even some over-the-counter medications. Additionally, you can use the funds to pay for qualified dental and vision expenses. There is no deadline for using the funds in your HSA, so you can let the money grow and use it in the future for medical expenses, unlike a Medical FSA which you cannot rollover from year to year.

Portability

Your HSA is also portable, which means that it stays with you even if you change jobs or retire. You can continue to use the funds in your HSA to pay for qualified medical expenses, and you can continue to contribute to your HSA as long as you have a high-deductible health plan.

Savings for Retirement

HSAs can also be a valuable tool for retirement savings. Typically, retirees are forced to withdraw funds from their retirement accounts to pay for medical bills. If retirement is far off for you, it is important to start saving now in an HSA in the event of costly medical bills into your retirement. After age 65, you can withdraw funds from your HSA for any reason without penalty, although you will have to pay taxes on the money if it is not used for qualified medical expenses. Since HSAs can be rolled over to Individual Retirement Accounts tax-free, retirees should rollover their HSA to an IRA, in order to preserve their tax-free growth, and use their funds without any restrictions. This would be a prudent strategy since those who enroll in Medicare become ineligible to contribute to their HSA, however, they can still hold the account and take distributions for medical expenses. Taking it a step further, their IRAs will be subject to required minimum distributions (RMDs) at age 73 (this can be subject to increase in future years), so the retiree should consider a series of Roth conversions leading up to their RMD date, to lessen the taxable amount they will be required to withdraw.

Final Thoughts

If you have a high-deductible health plan, opening an HSA can provide significant tax and financial benefits. Even without the tax benefits, saving up for potential medical expenses is not only a good idea, it's necessary from a financial planning perspective. It's been cited that the leading cause of bankruptcy in the United States come from medical costs. Since it's difficult to foresee medical costs coming down, and with people generally living longer, it's more important than ever to save using an HSA. Not only can you deduct contributions, but you can also enjoy tax-free earnings, flexibility, portability, and savings for retirement. For more tax and financial planning tips, feel free to subscribe to our mailing list, check back here for future posts, and even book a free consultation with us!