In a YouTube video, personal finance expert Tae Kim of Financial Tortoise likened a health savings account (HSA) to the ultimate retirement account. You can access this triple-tax-advantaged savings account through a high-deductible health plan (HDHP). You can use your contributions toward this account to pay for qualified medical expenses now and into retirement.
You must take a few smart steps to get the most out of an HSA. Kim offered nine ways to maximize your HSA contributions. Even if you don’t have an HSA now, Kim may persuade you to consider one if you’re eligible.
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Enroll in an HDHP
You can’t have an HSA without a qualified HDHP. A typical HDHP has a high deductible but a low premium. However, Kim said, “The real benefit of having an HDHP is the ability to open up a health savings account.”
An HSA’s eligibility requirements extend beyond having an HDHP. For instance, you can’t be enrolled in Medicare or have other health insurance coverage.
Kim advised calculating the financial benefits of an HSA to determine if switching to an HDHP makes sense for you.
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Open an HSA
Your employer might offer an HSA or you can open one through an HSA provider or certain financial institutions. Your health insurance company may also suggest partner providers.
Kim suggested considering fees and investment opportunities carefully when picking an HSA provider. He said to choose a provider that “can give you access to low-cost broad market index funds.”
Max Out Your HSA Contribution
Kim said that one of the most significant advantages of an HSA is its tax benefits. You can deduct your contributions from your taxable income, which means paying less in taxes. Plus, your contributions aren’t subject to FICA taxes. “If you have a decent income, this really adds up,” Kim explained. So, consider contributing as much as makes sense for you up to the annual limit.
In 2024, individuals can contribute up to $4,150 to an HSA, while families can contribute up to $8,300, according to Fidelity. And if you are 55 or older, you can add an extra $1,000.
Grab Your Employer’s HSA Contribution
To help reduce their company’s out-of-pocket health plan costs, some employers contribute to their employees’ HSAs, encouraging enrollment in HDHPs. Your employer may contribute a set amount to your HSA or even match your contributions, similar to a 401(k) match. You can increase your HSA balance with what Kim said is “free money.”
Maximize Your Tax Savings
An HSA offers a triple tax benefit. You can deduct your contributions from your taxes and the money grows tax-free. Withdrawals for qualified medical expenses are also tax-free. Kim suggested using the money to fund a Roth IRA or a taxable brokerage account and maximize these tax savings if you’ve already maxed out other tax-advantaged accounts.
Don’t Use Your HSA To Pay for Immediate Medical Expenses
Many people fund their HSA and immediately withdraw money for qualifying health expenses. However, Kim suggests a different approach: pay for these expenses out of pocket and let your HSA balance grow, at least beyond your initial contribution.
Since there’s no deadline for HSA reimbursements, you can save your receipts and get reimbursed years later, taking advantage of increasing returns over an extended period.
Invest Your HSA Funds
Kim stressed that letting your HSA money sit in a savings account means inflation will erode its value over time. Instead, he recommended treating your HSA like a retirement account by investing your funds in a low-cost, broad-market index fund long term. “This is how some people are able to have hundreds of thousands of dollars saved in their HSA account,” Kim said.
Keep Track of Your Medical Expenses and Receipts
Unlike retirement accounts such as a 401(k) or Roth IRA, HSA funds can be accessed anytime, as long as you have receipts to back up eligible medical expenses.
Kim emphasized the importance of recording all medical expenses, including receipts and transaction details. This allows you to reimburse yourself whenever needed, even years later.
To avoid problems, Kim suggested scanning receipts and tracking each eligible expense in a spreadsheet. By keeping thorough records, you can avoid taxes and penalties if the IRS audits you.
Treat Your HSA Like a Traditional IRA After Age 65
After turning 65, you can use your HSA funds for anything. If you withdraw the money for non-medical reasons, it’s taxed as regular income. However, you won’t pay taxes on withdrawals for qualified medical expenses.
Either way, Kim said, “You’re still able to reap some tax benefits by owning an HSA regardless of having spent it all on medical expenses or not.”
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This article originally appeared on GOBankingRates.com: 9 Ways To Maximize the Money in Your HSA, According to Personal Finance YouTuber Tae Kim
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