The Magic of an HSA
Can you imagine an investment account better than a Roth IRA? Believe it or not, such a thing exists! It’s a Health Savings Account better known as an HSA. To be eligible for an HSA, you must have a high-deductible health plan (HDHP) for your medical plan. HDHPs have lower monthly premiums than traditional health plans, but they also have higher deductibles, so be prepared. This means that you will have to pay more out of pocket for medical expenses before your insurance plan kicks in.
Better Than a Roth IRA
Why is an HSA better than a Roth IRA? With a Roth IRA, your contributions are made with after-tax money so you can enjoy tax-free growth, and you can take distributions from the Roth IRA tax-free in retirement. However, HSAs enjoy a triple tax advantage. Not only do the contributions grow tax-free and distributions are not taxed when used for qualified medical expenses (such as doctor’s visits, prescription drugs, and dental appointments), the contributions are made with pre-tax dollars, so your taxable income is reduced.
Additional Benefits
In addition to the triple tax benefit, the HSA is portable, which means that you can keep it if you change employers or health insurance plans. Also, many HSA providers offer investment options once your balance reaches a minimum threshold so your account can grow even more over time. This is a great way to sock away funds for future medical expenses like long term care in retirement. After age 65, you can use your HSA funds to pay for non-medical expenses, such as long-term care insurance premiums. In terms of convenience, most HSA plans make it easy to access online or via an app. A debit card is typically provided to pay for expenses.
The Magic of an HSA
While the intent is for the HSA to pay for medical expenses incurred while on a HDHP, ideally it is best to preserve your HSA balance and let the account grow tax-free. Strive to pay for medical expenses out of pocket rather than with HSA dollars. Consider cutting up the debit card so you’re not even tempted. Before converting to a HDHP coupled with an HSA, think about your family’s medical expenses and out of pocket costs so you aren’t hit with unexpected surprises. A HDHP is not for everyone. If it is palatable for your situation, then the triple tax advantage of an HSA is the way to go.
Have more questions? Contact Us
Missie Beach, CFP®, CDFA®
Senior Financial Advisor
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