Could the humble Health Savings Account (HSA) be the unsung hero of your pandemic financial plan? Financial experts say yes. HSA contribution limits jumped to $3,550 for individuals and $7,100 for families in 2020, so now is a great time to learn about their many advantages. Here are 5 tips to make your HSA dollars work hard for you.
Browse the thousands of allowable HSA expenses.
First aid kits. Lip balm. Pregnancy tests. Sunscreen. You might be surprised at what your HSA dollars can cover, and a ton of new items have just been added as a result of the COVID-19 CARES Act (H.R. 748). This amendment declares “Certain Over-the-Counter Medical Products as Qualified Medical Expenses” which makes pain relievers, heartburn medications, allergy relief and menstrual products finally eligible.
Check out HSA Store for a complete list of eligible items and care you can purchase with tax-advantaged dollars from your HSA. Search your commonly purchased items there, so when you hit the drug store you’ll know what can be paid with your HSA card, or easily reimbursed.
Bring your HSA along, no matter where your career goes.
Even if there’s a change in your employment status due to job loss, company change, or retirement, an HSA will follow you wherever you go because you are the account owner. This is especially great news for a Millennial-dominant workforce, often referred to as the “job-hopper” generation.
Why else is the portability of your HSA important? Because it allows you to take a long-term mindset and invest the money in your HSA, which is crucial if you want to maximize the benefits of this powerful financial planning tool.
Take advantage of the triple tax benefits.
With 3 separate tax advantages, HSAs offer a great potential for tax savings – in some cases, even more than 401(k)s and Roth IRAs. Here are 3 ways an HSA will reduce your tax bill:
- Contributions are pre-tax, helping you reduce your taxable income for the year.
- Earnings and growth are tax-free while your HSA dollars are invested.
- Withdrawals are tax-free if used to reimburse any of the wide array of qualified medical expenses.
Choose to reimburse yourself now or later.
As long as you keep receipts, you can wait years to reimburse yourself for qualified medical expenses you pay out of pocket for. This gives your invested HSA dollars even more time to grow tax-free, waiting for the moment when you need them most.
This also makes for a good early-retirement strategy. If you pay out of pocket for medical expenses during your working years, you can reimburse yourself with tax-free, penalty-free money from your HSA to fund a portion of your early-retirement lifestyle. And while we’re on the topic of HSAs and early retirement – you can use HSA dollars to pay for medical expenses during those gap years, which happen after you leave your employer’s health insurance plan behind, but before you’re eligible for Medicare at age 65.
Invest your HSA dollars like your 401(k).
Health Savings Accounts (HSAs) are a tax-advantaged way to set aside money for qualified medical expenses, and they’re also a great way to invest alongside your other retirement accounts.
Unlike a Flexible Spending Account (FSA), deposits you make to an HSA don’t have to be withdrawn and used by the end of the year. In other words, the use-it or lose-it rules don’t apply. In fact, you can invest and grow the money in your HSA just as you would a 401(k).
If you don’t incur a lot of out-of-pocket health care expenses throughout the year, your contributions can potentially grow for decades into the future. This helps you plan for significant, long-term health expenses that often get overlooked when thinking about retirement.
HSA accounts are only available to employees 18 years of age or older who are covered under a qualified High Deductible Health Plan (HDHP). Speak with a licensed professional to decide if the HDHP is right for you and your family.
About the Author:
Anthony is a Financial Advisor at LearnLux where the team is building digital tools that help employees create a plan for their money.
For more information on COVID-19 and your finances, head to https://info.learnlux.com/covid-19 where you can signup for a LearnLux individual account free of charge through July 15th.