Open enrollment for Medicare participants has been under way for more than a week now. But if you're still working, you may be in the midst of a different type of open enrollment — the one your employer just kicked off.
During the fall, it's common for companies to have workers elect benefits for the coming year. And so during this time, you may be in a position where you have to choose what health plan you want.
Many employers offer workers the choice between a low-deductible health insurance plan and one that comes with a high deductible. And at first, the latter may seem unappealing to you.
But high-deductible plans offer a major benefit besides the lower premiums that tend to come with them. If you enroll in a high-deductible health insurance plan for 2023 — defined as an individual deductive of $1,500 or more or a family deductible of $3,000 or more — then you may be eligible to make contributions to a health savings account (HSA). And that's an opportunity you don't want to pass up.
What makes HSAs so great?
Many people are familiar with flexible spending accounts (FSAs), which let you set aside pre-tax money for healthcare spending. But HSAs work very differently — and they offer far more benefits.
With an FSA, you're required to spend down your plan balance year after year or risk forfeiting funds. With an HSA, you can carry your money forward indefinitely and invest the funds you don't need to withdraw right away, thereby allowing your account balance to grow over time.
Just as importantly, HSAs offer a world of tax breaks. Contributions go in tax-free, investment gains are tax-free, and withdrawals are tax-free as long as you use that money for qualified healthcare expenses. There's really no other savings plan that comes with that many perks.
Sure, you can fund a traditional 401(k) and get tax-free contributions. And a Roth IRA will give you tax-free investment gains and withdrawals. But HSAs let you save on taxes in three different ways, and that alone makes them worth funding.
Another reason to participate in an HSA? As you might imagine, because these plans are loaded with tax breaks, there are steep penalties for taking withdrawals to cover expenses that aren't medical in nature. But once you turn 65, you can withdraw HSA funds for any reason and avoid penalties.
So, let's say you land in the fortunate position where come age 65, you have more money in your HSA than you anticipate needing for healthcare expenses. At that point, you can take a withdrawal to pay for a trip, a home update, or a new car — the choice is yours.
Now in that case, you will pay taxes on your withdrawal. But that's no different than the taxes you'll pay on withdrawals from a traditional IRA or 401(k) plan.
One of the best accounts out there
If your health insurance plan renders you eligible to fund an HSA, then it definitely pays to do so. And if you're torn between a low-deductible health plan and a high-deductible alternative, be sure to factor HSA eligibility into your decision.
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