It’s hard enough to motivate yourself to save for retirement, but saving for your future medical costs? How responsible does a person have to be?
Thankfully, health savings accounts, or HSAs, are tools that make saving for future health-related expenses less painful. These accounts allow you to save money, but they also allow you to invest. With open enrollment coming up, an HSA might be something to consider.
“One cool trick is to invest the money in an HSA just like you invest in your IRA,” Victor Medina, a certified financial planner and founder of Palante Wealth Advisors in Pennington, New Jersey, said in an email interview.
Investing through an HSA
Think of your HSA as a home for your medical money. Just like a brokerage account or an IRA, you’ll need to put money into the account before you buy investments. Then, after you fund the account, you can start investing.
Some HSAs offer tools that help you choose your investments and provide automatic rebalancing, so your portfolio stays within your preferred allocation. Others allow you to select from specific investments, such as stocks, bonds, mutual funds and ETFs.
Whatever method you choose, investing your money through an HSA will likely allow it to grow faster than by saving alone. However, if your HSA is offered through an employer, you may have fewer options for how you can invest your money.
Take advantage of the triple tax benefit
Once you start investing through your HSA, you can begin reaping the rewards — one of the biggest being the triple tax benefit, Medina said.
“Another cool trick is that the accounts are triple tax-advantaged, which means contributions are tax-deductible, growth is tax-free and the distributions are tax-free when used for qualified medical expenses. In addition, unlike a 401(k) or IRA, you don’t have to deduct money from the account at a certain age.”
If you’re investing over the long term in your HSA, that tax-free growth can make a significant difference in the amount of money you keep.
Prepare for long-term care
According to data from insurance company Genworth Financial, the median annual cost of an in-home health aide in 2020 was $54,912; a private room in a nursing home cost about $105,850 a year. Thinking about getting older can be challenging for many reasons, not least of all because of the financial burden that can accompany aging. But investing in an HSA can allow you to prepare for those expenses in advance.
If you invested $200 in an HSA every month starting when you were 30 years old and earned the stock market’s standard 10% annual return, by the time you were 70, you could have almost $1.3 million — a significant nest egg for your golden years.
And while it may be tempting to use your HSA money along the way, Faron Daugs, a CFP and CEO of Harrison Wallace Financial Group in Libertyville, Illinois, often advises against that.
“With clients that are generally working and still making a living, if they do qualify to contribute, I often encourage them not to use those funds on an annual basis, so let them sit aside and grow almost like you would in an IRA,” says Daugs.
Pay yourself back later
If you can avoid taking out HSA funds as you go, you can reap the benefits down the road.
“Another cool trick is to wait to take distributions from the account until much later in life,” said Medina in an email. “You are not required to reimburse yourself in the same year. You are only restricted to reimbursing yourself for expenses that occurred after the date the account was established. So, you can contribute money into the account, let it grow for decades and then take a lump-sum distribution in the future that would put money in your pocket tax-free. Make sure to keep the receipts for what you paid out of pocket for medical expenses.”
Unlike flexible spending accounts, or FSAs, which require you to spend the money within a specific time or otherwise forfeit it, HSAs can be rolled over from year to year.
Hack your IRA
According to Daugs, HSAs have a little trick up their sleeve to help people who don’t have a considerable amount of money saved up: You can rollover a maximum of your annual HSA contribution limit for that year ($3,600 for individuals in 2021) from a traditional or Roth IRA into your HSA.
“It’s available once in your lifetime,” says Daugs. “So let’s use the current example of $3,600. So if you had money in an IRA that was deductible, and the money has grown tax-deferred in that IRA, you can take up to $3,600 of that IRA, just one time in your life, and roll it into an HSA account.”
The IRA to HSA rollover is a neat trick you can use if you have an unexpected medical expense and your HSA isn’t as fleshed out as you’d like it to be.
And while HSAs have a lot of benefits, they aren’t for everyone. Because participants must be on a high-deductible plan to have an HSA, that can be a deal-breaker for some. Choosing a health plan during open enrollment will depend on your situation and the options available to you.