Myth #2: HSAs are for short-term medical expenses only

October is HSA Month. Each week this month, we’ll be busting a common myth around health savings accounts (HSAs) in hopes of increasing the access to and understanding of these helpful tax-advantaged savings vehicles. With healthcare costs in the U.S. continuing to rise, we hope to elevate HSAs and improve consumer understanding to deliver another tool that will ease the cost burden in retirement and make healthcare more affordable today.

If you have a question about how HSAs work, reach out to us on Twitter @alegeus or email [email protected].

 

Myth #2: HSAs are for short-term medical expenses only

Many people don’t think about an HSA as a long-term savings account. Instead, they think of it as an account used to set aside money, tax-free, to pay for immediate healthcare expenses – more along the lines of a flexible spending account (FSA). However, an HSA also makes an exceptional savings and investment vehicle, much like a 401k. In short, you can do three things with your HSA funds:

1. Pay for immediate eligible out-of-pocket healthcare expenses
2. Save to pay for future healthcare expenses or retirement
3. Invest for growth (once your funds reach an amount set by your HSA custodian)

HSA tax benefits also far exceed what most people realize. In fact, HSAs offer the greatest tax advantages of any benefit or retirement account, including 401ks. With an HSA, you can tap into the power of triple-tax savings:

1. Tax-deductible contributions, which reduce the federal income taxes you owe
2. Tax-free growth of funds
3. Tax-free withdrawal, as long as you use the funds on qualified out-of-pocket medical expenses

HSAs and future healthcare expenses

The funds you or your employer contribute to your HSA are yours to keep year after year, unlike the use-it-or-lose-it rule of FSAs. This allows you to save and grow funds over time for future expected or unexpected medical expenses. For example, money you save in your HSA this year could be used to pay for a surgery 10 years from now. As long as you spend HSA funds on qualified medical expenses, you will not receive a penalty for removing funds.

HSAs and retirement expenses

Healthcare costs continue to rise and have become one of the biggest concerns when it comes to retirement planning. A 65-year old couple leaving the workforce today can expect to need $280,000 to cover medical expenses during retirement. Directing savings to an HSA and maxing out your annual contributions, if possible, can help ensure you’re prepared for these rising costs. If you’re fortunate enough to have good health and little need for healthcare-specific savings later in life, you can still access your HSA funds but must pay ordinary income tax on the distribution and wait until age 65 to avoid penalties for withdrawal.