Open enrollment season is upon us, which implies hundreds of thousands of Americans are sorting amongst the assorted health plans on offer through their employer to come to a decision which one most closely fits their needs.
Various data points factor into this calculus, including premiums, deductibles, your anticipated health-care costs and whether insurers have providers you want of their networks. It is a deeply personal decision that no stranger on the web could make for you.
But as you are considering your options, financial advisors would really like to be sure that that you are taking one crucial financial tool into consideration.
In case your employer offers a high-deductible health plan (those with deductibles of at the least $1,500 for people or $3,000 for families), those that enroll in it gain access to a health savings account.
Like a versatile spending account, an HSA is funded through pre-tax dollars and could be used to cover medical costs all year long. Unlike an FSA, though, the cash doesn’t have a “use it or lose it” provision. Moderately, the funds sit in an account you own and might take with you need to you turn jobs.
Some 81% of accountholders keep HSA money in money, in accordance with a recent survey from the Plan Sponsor Council of America. But if you happen to use that cash to take a position, the HSA’s unique benefits as a retirement savings vehicle come to the fore.
“An HSA is indeed one of the vital powerful, yet underutilized, financial tools available, especially considering its unique triple tax advantage — contributions are tax-deductible, growth is tax-free and withdrawals for qualified medical expenses are also tax-free,” says Sean Lovison, an authorized financial planner and founding father of Purpose Built Financial Services in Moorestown, Latest Jersey.
“This feature positions HSAs not only as a tool for current medical expenses, but as a strategic component in long-term financial planning.”
Here’s how an HSA’s three-pronged tax profit works: As with an FSA, the cash you place into an HSA counts against your taxable income for the 12 months by which you make the contribution. But unlike an FSA, you’ll be able to spend money on an HSA the identical way you’ll a brokerage account, say, by buying a portfolio of mutual funds or exchange-traded funds.
Investments you hold within the account grow tax-free, and you’ll be able to withdraw funds from the account at any time, without owing income tax or penalties, provided you utilize the cash for qualified medical expenses.
In 2023, you’ll be able to contribute as much as $3,850 to an HSA as a person and as much as $7,750 if you happen to receive family coverage. To maximise your HSA’s potential as a retirement savings vehicle, financial advisors recommend contributing as much as you’ll be able to. Keep enough money readily available within the account to cover your annual deductible and invest whatever’s left over.
Under this convention, you’d pay for medical expenses out of pocket within the short-term in an effort to reap the advantages of long-term compounding growth. That signifies that this strategy is best fitted to someone with low health-care expenses and lots of money readily available to cover an emergency medical bill.
But good things come to those that can afford to attend. For one thing, there’s little or no doubt that you’re going to need the cash to fund your health care in retirement. A single person aged 65 in 2023 can expect to spend $157,500 on health care in retirement, in accordance with estimates from Fidelity.
And importantly, the medical expenses you withdraw money out of your HSA for haven’t got to be contemporaneous. So long as you retain your receipts for medical expenses along the best way, you’ll be able to reimburse yourself out of your HSA at any time without paying tax or a penalty.
“For people who’re in good health, making annual contributions and never using [their] HSA to pay for [medical expenses] creates multiple advantages,” says Michelle Fait, a CFP and founding father of Satori Financial in Seattle, Washington.
Not only do you construct up a stash of money for future medical expenses, she says, but “by also hanging onto your receipts for medical costs, you’ll be able to take out HSA funds as much as the whole of your receipts (or max within the HSA) at any time with no tax cost.”
Say you have got $100,000 in your HSA and need to take a $20,000 vacation. Provided you have got $20,000 price of receipts for qualified medical expenses you have racked up over time, you’ll be able to withdraw out of your HSA at any time and set sail tax-free.
Simply because an HSA offers a tax-efficient solution to save for health-care expenses in retirement doesn’t suggest that the account, or the insurance plan it’s tied to, is true for you.
Despite the attractive advantages, don’t let the tail wag the dog with regards to selecting an insurance plan, says Ashley Rittershaus, a CFP and founding father of Curious Crow Financial Planning in Revere, Massachusetts.
“Enroll within the best-fit medical insurance plan on your specific situation, considering your expected medical expenses, premiums, deductibles, out-of-pocket maximums and insurance coverage,” she says.
If you have got consistently high health-care costs and a decent budget, for example, a high-deductible plan might not be for you.
Moreover, consider whether an HSA investing strategy would impact you psychologically.
“Will you be less prone to seek medical care if you happen to know you will have to pay out of pocket? I imagine your health is more necessary than any financial profit, so if the reply to that query is yes, a standard health plan is likely to be the higher option for you,” Rittershaus says.
For those who find that a high-deductible plan is sensible, but you haven’t got the means to take a position the cash at once, that is advantageous too, financial pros say. On the very least, you are getting a tax break on money you put aside for medical expenses, the identical as you’ll in an FSA.
“Essentially the most powerful attribute of an HSA is not necessarily just the economics. It’s the pliability that you have got,” says Kevin Robertson, executive managing director at HSA Bank.
Depending in your circumstances, he says, there’ll likely be years when you have got to spend and others if you’re able to save lots of. “The flexibleness that an HSA can bring to that person is absolutely where the key lies.”