You’re probably familiar with the magic of compounding interest when it comes to long-term investing. But have you heard about the triple tax advantages of Health Savings Accounts (HSAs)?
This savings vehicle can help you turbocharge your retirement nest egg in some ways you didn’t know.
A Health Savings Account is a tax-advantaged savings account that allows you to set aside money to pay for qualified medical expenses. It’s paired with a high-deductible health insurance plan. To contribute to an HSA, you must have an eligible high-deductible health plan with a deductible of at least $1,500 for an individual or $3,000 for a family.
Your HSA contributions roll over from year to year, so your balance can continue growing tax-free indefinitely. The best part is that most HSA providers allow you to invest your contributions for greater growth potential, as with an IRA account.
In retirement, you can use your HSA tax-free for medical costs. Or if you’ve maxed out other retirement accounts, you can withdraw your HSA funds for non-medical expenses, paying regular income tax but no penalties.
You can use these HSA hacks to build up your wealth.
1. Max It Out
First, contribute as much as you possibly can each year. For 2024, that’s up to $4,150 for individuals or $8,300 for families.
By stashing away the full allowable amount, you’ll be able to leverage the power of tax-free compounding growth.
2. Understand the Triple Tax Benefits
HSAs get their superpower from 3 tax benefits:
1) Tax-deductible contributions that lower your taxable income.
2) Tax-free growth while invested.
3) Tax-free withdrawals for qualified medical expenses, even years down the road. Think of it as a retirement account on steroids.
3. Delay Reimbursement and Earn Tax-Free Growth
Don’t just view your HSA as a checking account for this year’s doctor bills. Unlike a Flexible Spending Account (FSA) where it’s use-it-or-lose-it, you can carry forward HSA money year after year.
So pay medical costs out-of-pocket if you can, and let that HSA money stay invested and compound those tax-free returns. Be sure to have other resources available to cover immediate medical costs.
4. Invest Smart
Take full advantage of being able to invest your HSA money just like you would with your 401(k) plan or IRA. Invest your HSA funds in low-cost index funds or ETFs which will deliver long-term growth.
SPDR S&P 500 ETF Trust (SPY) and Vanguard Total Stock Market ETF (VTI) are two popular exchange-traded funds (ETF) and are low-cost and excellent ways to invest in the US stock market.
Also, be sure to regularly rebalance your portfolio to keep your allocation aligned with your risk profile as you near retirement.
Final Thoughts
The earlier you start maxing out those HSA contributions, the longer your money has to grow exponentially bigger, thanks to compounding and those triple tax incentives.
Lastly, stay up to date about HSA contribution limits and always maximize your benefits. Follow these hacks and you might be surprised at how much your HSA account has grown as you near retirement.
