Key Points
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If you’re on a high-deductible health insurance plan, you may be eligible for an HSA.
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These accounts are extremely flexible and offer tax benefits that are hard to beat.
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If the only health insurance plan your employer offers is one with a high deductible, you might assume you’re in for a year of costly medical bills. But there may be a hidden benefit to being on a high-deductible health insurance plan, and it’s becoming eligible for a health savings account, or HSA.
You might assume an HSA will be a hassle. But giving up the opportunity to participate in one is a decision you might sorely regret.
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The triple-tax trifecta you can’t get anywhere else
If you’re familiar with retirement accounts like 401(k)s and IRAs, you may understand the concept of tax-advantaged savings. Traditional 401(k)s and IRAs let you contribute on a pre-tax basis, while investment gains in these accounts are tax-deferred. Roth 401(k)s and IRAs, meanwhile, give you tax-free gains and withdrawals.
An HSA gives you all of these benefits at the same time. Your money goes in tax-free, unused funds you invest grow tax-free, and withdrawals taken for qualifying medical expenses are tax-free.
A world of flexibility
If you’re used to saving in a flexible spending account, you may be familiar with the annoyance of having to scramble to use up your balance before it expires. HSAs don’t make you do that.
HSA funds never run out in your lifetime. You can fund an HSA at age 25 and carry that balance until you’re 65. In fact, you should try to leave your funds unused as long as possible, because the longer you carry an HSA balance, the more it can grow tax-free.
Now, as you might imagine, there’s a penalty for using an HSA for non-medical purposes. Since the IRS gives you a tax break on your money, it wants those funds used for healthcare expenses only.
But once you turn 65, your HSA effectively turns into a traditional IRA or 401(k) for non-healthcare expenses. At that point, non-medical withdrawals are subject to taxes, but there’s no penalty to worry about. This means that if you end up with a large balance, you can tap it for anything you want, whether it’s a new kitchen or a trip to Europe.
Of course, there’s a good chance you’ll be able to put your HSA to great use in retirement because healthcare costs tend to arise as people age. But knowing you get that flexibility might make an HSA seem more attractive.
So if you’re eligible to participate in one of these accounts, don’t say no off the bat. And you should also check whether your employer makes a contribution to your HSA, since some companies do. That makes participation a true no-brainer.
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