Avoiding HSA mistakes: Health Savings Accounts offer unique tax benefits and investment opportunities that many people aren’t aware of. By taking advantage of these, you can substantially increase the value of your account—so much so that it can act as a second retirement account!
Most people don’t start out choosing an HSA for the interest benefits. However, tax-deferred growth can multiply exponentially in the long run! Using a health savings account means setting yourself up for medical and financial success in the future when you eventually decide to pull from the money you’ve earned.
When you incur a qualified medical expense you can pay for it from your HSA. Or, you could pay for it directly, and reimburse yourself from your HSA at a later date. (Make sure to always save your receipts!) Doing so will allow the funds in your HSA to continue to grow, tax deferred. You can then withdraw the money to reimburse yourself for that qualified expense later—maybe in a year, five years, or 25 years. There’s no time limit!
Many banks even allow you to earmark a portion of your health savings account funds for stocks and bonds, mutual funds, and other investments to vary your portfolio and increase your wealth.
If you think that an HSA is the best of the best, wait until you hear about the option to combine it with a healthsharing plan! Mpowering Benefits, one of the most popular HSA-qualified healthsharing plans, provides beneficiaries with the tax benefits of a traditional health savings account while also giving them the low-cost benefits of a healthsharing plan (e.g., affordable monthly payments). You can read more about Mpowering Benefits here.
Using HSA Investments to Your Benefit
There are so many aspects to think about when planning for your financial future—retirement. When you retire, you’ll probably have most of the same costs that you do now, yet you might have less income.
How is this supposed to work? Well, our society touts the idea of investing your money now to provide more for yourself during the sunset season of life. However, this can be tricky when life never seems to get less expensive.
One of the best ways to do this is by using your health care budget to work for you, instead of allowing it to be a drain on what you can invest into your retirement fund. In 2023, Fidelity reported that the average retirement-aged couple could spend about $315,000 on health care in their last decades, which doesn’t include amounts for long-term care, such as nursing homes.
You don’t have to settle for pulling from your retirement accounts to plan for health care, though. Instead, choose an HSA, or a health savings account, which comes with a three-for-one tax break. The benefits of HSA investments include:
- Tax-deductible contributions to your HSA
- Tax-deferred growth
- Tax-free withdrawals (for qualified spending)
Here’s another insider tip (don’t let this stay insider, either—spread the word to your friends and family!). Once you reach 65, HSA plans allow you to withdraw money for other retirement-related expenses. You’ll still have to claim distribution payouts as income, but your account will now work more like an IRA.
Even if you don’t know you’re making HSA mistakes, they can still hurt you. The more knowledge you have, the more you’ll be able to ensure that you are setting yourself up with the most money available to you during retirement. Now that you know you can invest funds from HSA plans, let’s talk about why you should.
The Employee Benefit Research Institute says that almost all HSA owners keep their accounts in cash; only about 4% use their funds for investments. It’s true that cash is the most secure when the market is unstable; however, it doesn’t provide the growth opportunities that investments do.
This lack of investment happens because many HSA providers fail to give the appropriate guidance to consumers regarding their investment options and/or how to go about purchasing them. Some employers change providers often, which makes the process even more confusing.
Consider using your HSA plan as a long-term savings account with variegated assets, just like a regular retirement account or investment portfolio. You still have the option to keep a small amount of cash set aside for short-term health-related costs.
Inflation is the biggest enemy of cash. Think about how much less a dollar is worth now than when you entered the workforce 20, 30, or maybe even 40 years ago. That’s not going to stop. So, if you continue to let your HSA sit dormant, inflation is going to eat away at that cash value bit by bit, year by year.
There’s even worse news about inflation—it affects health care costs more severely than it does almost anything else (except maybe real estate). Medical costs, on average, end up rising at a rate of over 70% compared to the normal consumer price index each year. To stay on pace with rising costs, investing your HSA dollars is essential.
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How to Grow Your Investment & Avoid HSA Mistakes
You’ve read all this and now you’re wondering how to grow your health savings account so that you’ll be set for your retirement years as well as how to make up for the HSA mistakes that you made in the past. Don’t worry—we’ve got you covered.
If you invest your “tuppence”, as Mr. Banks sings about in Disney’s classic Mary Poppins, “soon that tuppence will compound, and you’ll achieve that sense of conquest as your affluence expands.” Even modest returns from HSA plans can top off retirement accounts considerably.
Want the numbers? In 2022 the max allowable contribution for a health savings account was $3,650. Let’s say someone does this for 30 years. Their regular contributions would total over $100,000 but with interest, that would compound to double the amount!
Okay, okay. This person started early on in life because someone taught them well. We know, shoulda, woulda, coulda. Better late than never, though, to fix those HSA mistakes.
If you weren’t so lucky as to have a financial mentor like the person in the example above, you’re not out of luck. You also have the option to make catch-up contributions once you’re 55 to pad things for the future. You can add an extra $1,000 each year, and if you and your spouse are both over age 55, you can both contribute an additional $1,000.
Growing your HSA can be even easier than growing your IRA. For example, there is a higher contribution limit on a family HSA than there is on an IRA. Be careful not to withdraw early for non-medical expenses, though; you’ll not only pay income tax but an extra 20% fee on each withdrawal.
Continue to consider your short- and long-term goals when deciding how to invest your HSA funds and how much to leave in cash. Cash isn’t bad—you’ll need some at many points. But don’t let the investment opportunity pass you by.
Keep a close eye on the stock market, and ask for help from a financial planner or benefits advisor if you need it. You’ll want to put in equity when the market is down so that it makes more for you when it rises (and not have you lose money if you need to pull when it’s in a slump).
The Bottom Line
All this to say, the more money that you can add to your HSA plan—and the longer you can keep it there without withdrawing—the better off you’ll be financially (concerning your medical provisions).
Reach out to us so we can help you figure out the best plan for you. Our Benefits Planners have extensive experience in HSA-qualified health insurance and health sharing, and are familiar with the different plans available in your area so that you are set up well for the future. Everyone wants to live their retirement years out in peace and comfort—we’ll help get you on the right road to a secure retirement. Schedule a phone consultation now to learn all your options!
Whitney Kline is a Personal Benefits Manager (PBM) for HSA for America. As a PBM, she helps individuals and small businesses find money-saving alternatives to traditional health insurance – including HSA plans, health sharing programs, DPC memberships, and other innovative solutions.