Lillian Turner
If you had three wishes, what would you wish for?
Perhaps your wish would be for a fountain of youth, an endless supply of garlic bread, or a year long cruise around the world.
If I were magically given three wishes, I would probably ask for:
- A giant library filled with every book in the world
- A private island in the Caribbean filled with dogs who lived forever
- A never-ending closet full of designer shoes
A close second choice though would be:
- More money
- For that money to grow tax free; and
- For a greater sense of security when it came to future emergencies
While my first set of wishes will likely never materialize, my second choice has already come true!
Let me introduce you to my magic lamp, or as some call it – the HSA. A Health Savings Account (HSA) operates similar to a personal savings account, only it’s used for medical expenses that can’t be covered by insurance.
HSAs offer triple tax benefits – the money you put in is tax free, your earnings grow tax free, and you can spend the funds tax free for qualified medical expenses. The funds you contribute are also tax deductible!
In case you missed that, let me repeat: TRIPLE TAX BENEFITS! This is pretty much unheard of in the investment industry, so if that doesn’t get you hyped up, I don’t know what will.
Another fantastic benefit of the HSA is that it can also be used as an investment vehicle. Once you hit a certain account value (typically $1,000-$2,000, depending on your plan) you are eligible to invest the remaining balance in the market. You likely won’t have the same investment options as an IRA, but there should be a decent selection of index funds available to choose from.
Great! So…where do I sign up?
In order to contribute to an HSA, you must be covered under a high-deductible health plan (HDHP). It’s important to note that not all high-deductible health plans qualify for an HSA, although most do.
If you have a HDHP but don’t have an HSA set up, you can choose a provider yourself. I would recommend contacting your HR representative for more information. Even if you change companies throughout your career, your HSA will stay with you.
In 2024, both you and your employer may contribute up to a maximum of $4,150 for a single person or $8,300 a year per family, with a $1,000 catch up contribution if 55 or older. You can do so through automatic payroll deductions or direct contributions up until April 15th of the following year. You can contribute until you enroll in Medicare, even if you stop working.
Once your Health Savings Account has been opened, you will receive a debit card that you can charge directly for prescriptions, doctor’s office visits, lab tests, and anything else you might need.
Not only can your contributions be saved and invested for the future, but they can also be used on a short-term basis for elective procedures – such as LASIK eye surgery or braces. HSAs are a fantastic tool to have in your arsenal if you’re planning on having a baby in the future as well. Fertility treatments can be covered by an HSA, as well as prenatal vitamins, baby supplies, and birthing classes. If you need to travel for surgery or medical treatment, your HSA may be used to cover hotel and meal expenses on the way. Even guide dogs are an allowable expense!
However, if you can afford to cash flow medical expenses instead of dipping into your HSA every year, I highly recommend that you do so and keep the receipts. By paying out of pocket for basic medical expenses instead of using your HSA balance you can create the opportunity for a backup emergency fund.
There is no statute of limitations on health care expenses which allows you to reimburse yourself from an HSA at any point in time, even decades down the road (provided all receipts were retained). By paying out of pocket, you are allowing your HSA funds to continue their investment growth.
The biggest (and most unpredictable) expense for retirees is often health care. A few procedures can add up quickly – let alone the expense of being diagnosed with cancer, heart disease, or another familiar ailment. In fact, the average cost of healthcare throughout retirement is $295,000, so a fully loaded HSA can really come in handy.
I don’t want to scare you, but I do want to prepare you! Oftentimes, we refuse to think about our own morbidity because it isn’t pleasant. However, being prepared in case of medical emergencies can make the setback much more bearable (at least financially).
HSAs can also be used to pay for COBRA or Medicare premiums, long-term care costs (another HUGE expense in retirement), dental and vision care, prescription medications, and medical copayments or coinsurance. The best part is that you don’t have to spend your HSA funds solely on yourself, you may also use them for a spouse or child!
If your company offers an HSA, I highly recommend contributing up to the maximum amount if you can afford to do so. These accounts are incredibly powerful and offer unique benefits that aren’t available in other types of investment accounts.