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5 Good Reasons to Save in an HSA

5 Good Reasons to Save in an HSA

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5 Good Reasons to Save in an HSA

Open enrollment is kicking off at many companies, which means now may be the time for you to start electing your benefits for the year. And if you end up enrolling in a high-deductible insurance plan, it means you may be eligible to participate in a health savings account (HSA).

Many people routinely confuse HSAs with FSAs, or flexible spending accounts, but HSAs offer far more benefits. Here are a few reasons why it pays to put money into an HSA.

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1. You'll lower your tax burden up front

You may be familiar with traditional IRA and 401(k) plan contributions, which are made on a pre-tax basis. HSAs work similarly in that contributions are tax-free, so the more money you put in, the less income the IRS will tax you on.

2. You'll enjoy tax-free investment gains

Once you have money in HSA, you can invest it so it grows into a larger sum. Better yet, your investment gains won't be subject to taxes. In this regard, HSAs work similarly to Roth IRAs and 401(k)s.

3. You'll get to take tax-free withdrawals

One reason why so many people like saving for retirement in a Roth IRA or 401(k) is that withdrawals from these accounts are tax-free. Well, HSAs offer the same benefit, provided you take withdrawals for their intended purpose, which is to cover the cost of qualified medical expenses.

4. You'll have a way to pay for healthcare in retirement

Healthcare can be retirees' greatest ongoing expense, and unfortunately, that means it can become a huge burden at that stage of life. Fidelity estimates that the average opposite-gendered 65-year-old couple today will spend a whopping $300,000 on healthcare throughout retirement when we account for costs like Medicare premiums, copays, and deductibles. Having money in an HSA could ease that burden, especially at a time in life when money may be tight.

5. You'll have money you can use for any reason once you turn 65

Because HSAs offer so many tax breaks, the rules surrounding them are pretty strict. If you withdraw money from an HSA for non-healthcare purposes, that sum will be subject to a 20% penalty. That's double the penalty that applies for taking an early withdrawal from an IRA or 401(k) plan. Ouch.

But there's an exception to that rule for HSA holders aged 65 and over. Once you turn 65, you can take an HSA withdrawal for any reason and avoid penalties. And while you will, in that scenario, have to pay taxes on your withdrawal, the same would apply for money withdrawn from a traditional IRA or 401(k).

It pays to participate in an HSA

HSAs can be an extremely useful savings tool. Not only can you use one for near-term medical needs, but you can use your money at any point in life. In fact, it's fair to think of HSAs as a retirement savings plan of sorts. And if you're in a position where you're able to max out your retirement plan and still have money available, an HSA is a really good place to put it.

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