Jean Chatzky
How confident are Americans about reaching their long-term financial goals — particularly those that involve retirement? Not very, according to PWC’s recent Employee Financial Wellness Survey. The primary cause for their concern? Healthcare costs, which not only continue to escalate each year at a pace ahead of inflation, but which are projected to cost a 65-year-old couple a whopping $280,000 in retirement, not including long-term care. More and more these days, we have a weapon in this fight. It’s called a Health Savings Account (HSA) — and you may be eligible to open one if you’ve got a high deductible healthcare plan. Used smartly, it can enable you to save on your current healthcare costs while simultaneously growing any unused dollars to be used down the line — tax free. If you’ve got an HSA, here are five ways to make the best use of it.
Start your HSA ASAP
Like other savings accounts, the earlier you start your HSA the better. Why? “Because you cannot reimburse expenses that were incurred before you started your HSA on a tax-free basis,” says Roy Ramthun, President and Founder of HSA Consulting Services. He adds that with so many people facing higher deductibles these days, you don’t want to miss out on any eligible expenses.
Contribute as much as you can
HSA contributions are made with pre-tax dollars. That alone shaves a good 25% off the cost of any healthcare you buy from the account. The maximum singles can contribute to an HSA this year is $3,450 and $6,900 for families. If you’re 55 or older, you can make an additional catch-up contribution — kicking in an extra $1,000 — but each person needs to have their own account in order to contribute the full amount. If those totals sound hefty, try funding an HSA the same way you do a 401(k) or other retirement account — with automatic monthly or bi-weekly contributions. Don’t worry about not using all the money you contribute. An HSA doesn’t work like a flexible spending account where contributions are lost if they’re not used. In fact, you can spend the money on healthcare first, then put just enough pre-tax money into the account to pay the bills. “If you don’t have enough, you can add more money to the HSA up to the maximum for the year,” says Ramthum, explaining that you have until April 15th of the following year to do it.
Save your funds (and receipts) and reimburse yourself later
Alternatively, you can grow the money in your HSA (more on this in a moment) then use it to reimburse yourself years down the road. “Let your HSA balance build up by delaying reimbursements from the account until a later date — but hang on to your receipts so you can justify, if needed, your tax-free reimbursement for eligible medical expenses,” says Ramthun. He adds that since HSAs do not have a “use it or lose it rule,” you can hang on to your receipts for as long as you want and reimburse yourself down the road. “As long as this does not impinge on your cash flow, you could wait five, ten, or even twenty years before you reimburse yourself for eligible medical expenses you or your family members incurred,” says Ramthun.
Invest your HSA like your IRA
This strategy of delaying the use of your HSA funds works best when they’re worth more down the road than they are today. Far too few people a) know this and b) are doing it, but funds in many HSAs can be invested just like those in other investment accounts. “Consider investing your HSA account funds in stocks, bonds, or mutual funds, just as you would in a 401(k) or IRA. Historically, this is the best way to building savings,” says Ramthun.
Know when to use your HSA
Put all these moves together, and what you have is a vehicle that lets you a) take a tax deduction for putting money away, b) grow the money tax free and c) pay no taxes when you pull the money out for qualified medical expenses today or years down the line. There’s more leeway than people understand in what HSA funds can be used for, explains Joel Shalowitz, professor of Preventive Medicine at Feinberg School of Medicine at Northwestern University. “Many people do not know that long-term care insurance premiums can be paid from an HSA, [although] there are age-specific limits on how much can be paid from the account,” he says. That’s a big deal. Other eligible expenses include deductibles and co-pays for medical care, prescription drugs, and bills often not covered by insurance such as vision and dental care. He adds that things like over the counter drugs cannot be paid from an HSA.
With Hattie Burgher
Chris O'Shea
