Buying health insurance is smart for your health and for your finances, but a high deductible health care plan could prevent you from getting the care you need. There is a solution, and it comes with a lot of great bonuses. If you’ve never heard of a Health Savings Account (HSA), then keep reading. Not only can an HSA make healthcare more affordable, but it could also turn into your best investment vehicle.
Introducing the Health Savings Account
If you have a high deductible health insurance plan through your employer or as an individual plan, you can qualify to invest in a health savings account. (According to 2017 rules, individuals must have a health insurance plan with a minimum $1,300 deductible, while families must have a $2,600 deductible.)
An HSA allows you to stockpile money each month that you can then use to pay for medical expenses, including:
- Prescription drug costs
- Other medical expenses
On the surface, the HSA is a convenient way to save money so that you can afford to utilize your high deductible health insurance plan. However, this only scratches the surface of what the HSA can do and how it can turn into an excellent investment vehicle.
Tax-Free Deposits and Withdrawals
One of the most powerful features of the HSA is that it allows you to make deposits tax-free and then to withdraw the money tax free as long as you use it to pay for qualified medical expenses. By fully funding your HSA, you can lower your taxable income and possibly even drop into a lower tax bracket!
Rollover Each Year
How does an HSA compare to a Flexible Savings Account (FSA)? One of the biggest drawbacks of the FSA is that you must spend all the money in your FSA each year, and any remaining funds are forfeited. This forces you to try to magically predict how much you’ll spend on healthcare each year and often leads to a buying frenzy at the end of the year to use whatever is left over in your account.
Unlike an FSA, the money in your HSA rolls over from year to year, so you never have to worry about losing your money.
The HSA Is an Investment Vehicle
The money in your HSA doesn’t have to sit in your account losing value to inflation. Instead, you can treat it just like an investment vehicle. You can invest your HSA funds into mutual funds, stocks, and bonds. The investment will grow tax-free year after year.
In many ways, your HSA can almost act like an IRA that gives you even more freedom, since you always have the option to withdraw funds to pay for important healthcare expenses. It’s not surprising that some financial advisors believe that you should consider opening and fully funding your HSA before other traditional retirement accounts unless you are receiving an employer match on your 401(k).
Other Important Facts about an HSA
Here are a few other facts to consider regarding an HSA:
- When you create an HSA, you’ll receive a debit card or checks that you can easily use to pay for all qualified health-related expenses, including vision and dental care.
- The yearly limit of how much you can deposit is $3,500 for individuals and $6,750 for families in 2019.
- If you are older than 55, you can invest $1,000 more than those standard limits.
- You can no longer make contributions to your HSA when you turn 65 and enroll in Medicare, but you can still withdraw money to pay for health expenses not covered by Medicare.
- You can choose to withdraw the money from your HSA and spend it on non-health-related expenses, but the money will be taxed, and you’ll pay an additional penalty fee.
How to Sign Up for an HSA
Ready to sign up for an HSA? Your insurance provider through your employer may already offer an HSA. If not, a quick internet search will bring you to a variety of providers. Before you sign up for an HSA, make sure you choose a company that offers low-fee investment options so that your money really has a chance to grow!
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