A health savings account or HSA can be a great help when it’s needed to tap the funds and it’s a tool to save money for retirement.
Money Talks News’ recent article “3 Ways a Health Savings Account Can Improve Your Finances” explains that an HSA can help you stretch your health care dollars and build your retirement savings at the same time, provided you’re eligible for one and you spend the money in your HSA on eligible expenses.
Let’s look at the benefits of HSAs and tips for opening one:
- HSAs are tax-free. Depositing funds in a health savings account is one of the very few ways you can do to entirely avoid paying any taxes on that money at any point. Compare that to money in tax-advantaged accounts, like 401(k)s and individual retirement accounts (IRAs), that may grow tax-free. However, you will pay taxes on at least the principal at some point.
However,with an HSA, you get a tax deduction for the money you put into the account. The earnings grow tax-free, and provided that you use it for qualified health care expenses, you don’t pay taxes on the money you withdraw from the account. It’s truly tax-free.
- HSAs are more flexible than FSAs. A health flexible spending account (FSA) is another type of tax-advantaged account for stretching health care dollars.
However, FSAs have a big drawback: FSAs are subject to a “use-or-lose” provision. This means workers are usually required to spend any money in their FSAs within their health insurance plan year or else lose the money.
However, with an HSA, your money stays in the account and thus can grow year after year.
- You can invest the money in your HSA. You are allowed to invest the money that’s in your HSA, so it can grow faster with investment options. The investment options will vary depending on where you open your HSA.
It is fairly easy to start an HSA, but you must be eligible for one. The IRS says that the primary requirement to qualify is that you are covered by a high-deductible health insurance plan. To open an HSA, you pick a custodian—an institution that offers HSAs.
Reference: Money Talks News (May 26, 2020) “3 Ways a Health Savings Account Can Improve Your Finances”