Understanding HSAs
The first major benefit of an HSA is that your contributions are tax deductible up to a yearly limit. The money in your HSA can then grow, free of taxes, as long as you keep it in the account. When it’s time to pay for healthcare expenses, you won’t have to pay income taxes on your gains.
Since there’s a yearly limit on how much tax-free money you can contribute to an HSA, it’s best to start young. If you’re 55 or older, you can contribute an additional $1,000 dollars annually, as a catch-up contribution.
To use an HSA, you have to choose a plan that meets certain requirements. Check with your insurance brokers or employer to see if your plan is HSA compatible. As with any tax-advantaged account, you can face penalties if you withdraw the money for non-healthcare-related purposes before you turn 65. Once you reach age 65, you can withdraw your HSA funds tax free, regardless of whether you’re using them for medical expenses.
Accounts for saving
If you’re healthy enough to avoid significant medical costs, or have enough cash to pay out of pocket, consider an HSA that’s geared towards saving. These accounts will have investment options, offering both actively managed and index funds, alongside the ability to invest in core asset classes. It’s ideal to find an HSA that allows first-dollar investing, although most HSA providers require you to keep $1,000-$2,000 in your account before you can invest it. You should also opt for an account that charges low fees and offers a good interest rate.
Accounts for spending
Many people choose to use their HSA like a checking account that’s strictly for paying medical bills. If you plan on spending your HSA money regularly, your account won’t carry a high balance for long periods of time. Therefore, you shouldn’t prioritize getting an HSA with investment options. Instead, look for an account that offers no monthly fees — even if it means sacrificing interest entirely. According to Mila Araujo, a contributor to The Balance, you can easily pay $50 in annual fees for an account that earns interest. However, if you keep a relatively low balance, you may only earn $2 dollars in interest. That means you would save more money by choosing a fee-free, no-interest account. Many HSAs do offer a fee waiver if you maintain a certain minimum balance, however.
When managed to suit your needs, an HSA can be a powerful investing tool. To learn more about choosing the right HSA for your needs, talk to your insurance provider and a financial advisor.