The tax advantages of a healthcare savings account are like those of a traditional IRA, a Roth IRA, or a 529 college savings plan.
The account can be used like a checking account to pay for medical bills as they arise, as an investment account to grow funds for health care costs down the road, or as a combination of the two.
Below are five reasons why an HSA might be the right option for you.
HSAs cut taxes now
An HSA is a savings account that lets you save pre-tax dollars to pay for health care expenses. Contributions are pretax and reduce your taxable income.
HSA funds grow tax-free
When used to pay for qualified medical expenses, HSA withdrawals are tax-free. However, to qualify for an HSA, you must have a high-deductible health plan (HDHP).
You can use your HSA funds to pay coinsurance, copays, and your deductible (all tax-free).
You can also use HSA funds to pay for some costs your plan doesn’t cover, like dental care, orthodontia contacts, and eyeglasses. If you use HSA money for non-eligible expenses, you will pay taxes and a penalty on the money you took out, unless you are over 65 years of age.
You’re in control
The money in your HSA account earns tax-free returns and any unused HSA funds are carried into future years when you need them. Plus, you can use your HSA to save for retirement.
At age 65, you can use the funds for any purpose without a penalty. The money you take out to pay for eligible health care expenses continues to be tax-free. You also can take money out for other reasons without paying a penalty.
It’s your money!
You decide when and how to spend or save the money in your HSA. The money is yours forever. It doesn’t expire, and you can take it with you if you change jobs or switch to another high-deductible health plan.
Your investment can grow
Just like a brokerage account or an IRA, you’ll need to put money into the account before you buy investments. Then, after you fund the account, you can start investing.
Some HSAs offer tools that help you choose your investments and provide automatic rebalancing, so your portfolio stays within your preferred allocation. Others allow you to select from specific investments, such as stocks, bonds, mutual funds, and ETFs.
Whatever method you choose, investing your money through an HSA will likely allow it to grow faster than by saving alone. If your HSA is offered through an employer, you may have fewer options for how you can invest your money.