Why Funding an HSA Is Really a No-Risk Prospect

Healthcare is one of those expenses that can burden you at any time. You might end up injured in your 30s and stuck with a host of medical bills. Or, a health issue might arise in your 50s, leaving you on the hook for countless copays as you go through different tests.

Meanwhile, you can pretty much bank on spending a lot of money on healthcare once you reach retirement. As people age, health issues tend to arise, and in some cases, more screenings and preventive care become necessary. And while Medicare will sometimes pick up the tab for such services, other times, it won’t.

That’s why it’s so important to sock away plenty of money for healthcare spending purposes. And in that regard, you have options. You can boost your savings account to cover medical bills while you’re working, or add extra money to your IRA or 401(k) plan so you have extra cash to tap during retirement.

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But another option it pays to consider is funding a health savings account, or HSA. Not only do these accounts offer a world of tax benefits, but they also leave you with plenty of options for using up your money.

You’re not limited at all

HSAs offer more tax breaks than any other tax-advantaged savings plan. With an HSA, contributions go in tax-free and withdrawals are also tax-free provided they’re used to cover qualified medical expenses.

Furthermore, HSAs don’t require you to spend down your plan balance every year like flexible spending accounts do. In fact, you can invest the funds you’re not using so they grow into a larger sum over time, and any investment gains in your account will be yours to enjoy tax-free.

But let’s get back to using up your HSA funds. Because HSA dollars never expire, you can contribute to one of these plans during your career and reserve all of that money for retirement, when healthcare might end up being a huge financial burden.

Now you may be thinking “What happens if I overfund my HSA, or invest it so well that I have more money than I need to spend on healthcare later in life?” Clearly, that would be a good problem to have. But it’s also not a problem at all.

See, before age 65, non-medical HSA withdrawals are subject to steep penalties. But once you turn 65, you’re allowed to take money out of an HSA for any reason without being penalized.

Now in that situation, you won’t be able to get your money out tax-free. But paying taxes on non-medical withdrawals also isn’t so terrible, namely because you’re not taxed on the money that goes into your HSA in the first place. In fact, taking a non-medical HSA withdrawal at or after age 65 is basically the same as tapping a traditional IRA or 401(k) plan.

It pays to fund an HSA

All told, HSAs are an extremely flexible savings tool loaded with tax breaks, so it pays to take advantage of one if you’re on a high-deductible health insurance plan and are therefore eligible to contribute. And the sooner you start funding an HSA, the more options you’ll set yourself up with during retirement.

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