Open enrollment is being rolled out at many companies, which may mean now is the time for you to start choosing your benefits for the year. And if you end up taking out a high deductible insurance plan, that means you may be eligible to participate in a Health Savings Account (HSA).
Many people routinely confuse HSAs with FSAs, or flexible spending accounts, but HSAs offer many more benefits. Here are some reasons why it pays to put money in an HSA.
1. You will reduce your tax burden from the start
You may be familiar with the traditional IRA and 401 (k) plan contributions, which are made on a pre-tax basis. HSAs work the same way in that contributions are tax-free, so the more money you invest, the less income the IRS will tax you.
2. You will enjoy tax-free investment gains
Once you have the money in HSA, you can invest it so that it grows to a larger amount. Best of all, your investment earnings will not be subject to tax. In this regard, HSAs work the same way as Roth IRAs and 401 (k) s.
3. You will be able to make tax-free withdrawals
One of the reasons that so many people like to save for their retirement in a Roth IRA or 401 (k) is that withdrawals from these accounts are tax-free. Well, HSAs offer the same benefit as long as you are making withdrawals for the intended purpose of covering the cost of eligible medical expenses.
4. You will have a way to pay for your health care when you retire.
Health care can be the biggest daily expense for retirees, and unfortunately that means it can become a huge burden at this point in life. Fidelity estimates that today the average 65-year-old opposite-sex couple will spend $ 300,000 on health care throughout retirement when we factor in costs like health insurance premiums, quotes. -parts and franchises. Having money in an HSA could ease this burden, especially at a time in life when money can be tight.
5. You will have money that you can use for any reason after you turn 65
Because HSAs offer so many tax breaks, the rules around them are quite strict. If you withdraw money from an HSA for non-medical purposes, that amount will be subject to a 20% penalty. This is double the penalty that applies for early withdrawal from an IRA or 401 (k) plan. Ouch.
But there is an exception to this rule for HSA holders aged 65 and over. Once you are 65, you can make an HSA withdrawal for any reason and avoid penalties. And although in this scenario you will have to pay taxes on your withdrawal, so will the money withdrawn from a traditional or 401 (k) IRA.
It pays to participate in an HSA
HSAs can be an extremely useful savings tool. Not only can you use one for short term medical needs, but you can also use your money anytime in your life. In fact, it’s fair to think of HSAs as some sort of retirement savings plan. And if you’re in a position where you’re able to maximize your retirement plan and still have some cash on hand, an HSA is a great place to put it.