If you're enrolled in a high-deductible health insurance plan, you may be eligible to participate in a health savings account (HSA). And doing so could really work to your benefit.
HSA funds never expire, so you can carry your balance into retirement, when you'll likely need more money than ever to cover your healthcare expenses. Also, HSAs come with three distinct tax benefits: Contributions to these accounts are tax-free, investment gains are tax-free, and withdrawals for medical bills are tax-free.
Putting money into an HSA is a smart move, so if you're doing that already, congrats. But if these signs apply to you, you may not be getting the most benefit out of your plan.
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1. You're not maxing out
The amount of money you can put into an HSA changes by year and hinges on whether you're saving just for yourself or at the family level. In 2023, you can contribute up to $3,850 to an HSA for self-only coverage or up to $7,750 for family coverage.
If you're not maxing out for financial reasons, that's one thing. But if you've simply neglected to raise your contribution rate because you've been sticking to last year's limits, that's a different story and a situation worth correcting.
2. You're taking withdrawals for every medical bill
One benefit of HSAs is that your funds never expire. You can invest money you don't need to withdraw immediately and enjoy tax-free gains in your HSA, too. That could make it possible to build a large balance between now and retirement. However, your balance will struggle to grow if you keep withdrawing HSA funds to cover near-term medical bills.
If you can't afford your healthcare bills without tapping your HSA, then by all means, dip in. You're better off doing that than landing in medical debt. But if you can swing your healthcare expenses without touching your HSA, you're better off leaving your balance alone and letting it increase over time.
3. You're not making catch-up contributions once you're eligible
Just as it's possible to make catch-up contributions to an IRA or 401(k) plan, so too does this option exist for an HSA. The rules are just a touch different in that catch-up contributions become possible for IRAs and 401(k)s at age 50. With an HSA, you must wait until age 55 to make catch-up contributions. And whether you're funding an HSA at the individual or family level, your catch-up contribution will max out this year at $1,000.
Many people eligible for HSAs opt not to participate, so the simple fact that you've opened an HSA is great news. But why not make sure you're getting the maximum benefit from your account by maxing out, making catch-up contributions, and leaving your funds alone to the extent that you can?
Fidelity estimated that the average 65-year-old couple retiring last year would need $315,000 to cover healthcare expenses in retirement. Kicking off your senior years with a giant HSA balance could make that figure seem a lot less daunting.
