I Have Money in an HSA but Won't Touch It. Here's Why
KEY POINTS
- The money in my HSA could help cover my near-term medical bills.
- Because that money gets to grow tax free, I'd rather keep it invested and reserve it for retirement, when I might end up needing it even more.
- An HSA can become another retirement account, and allows for non-medical withdrawals with no penalty after age 65.
Last year, my family switched over to a high-deductible health insurance plan. And while that wasn't the best thing, since it now has us paying a lot more for medical care, the silver lining was that our new plan renders us eligible to contribute to a health savings account, or HSA.
HSAs are a hybrid savings and investment plan whose main purpose is to cover medical costs. To participate in an HSA this year, your health insurance plan has to have a minimum deductible of $1,500 for self-only coverage and $3,000 for family coverage. It also has to have a maximum out-of-pocket limit of $7,500 for self-only coverage and $15,000 for family coverage.
Meanwhile, over the past few months, I've had to dip into my savings account to cover some larger healthcare expenses, like an orthopedist bill for my daughter and a bill for medical tests I had to undergo. I could've raided my HSA for those expenses. But here's why I didn't.
It's all about enjoying tax-free growth
HSAs offer three different tax breaks. Your contributions go in tax free, and any money you don't need to spend on healthcare right away can be invested in a tax-free manner. HSA withdrawals are also tax free when used for qualified medical expenses.
Since I like the idea of tax-free growth, I'm motivated to keep my money in my HSA as long as possible. My goal, in fact, is to grow that balance into a large sum for retirement, when I'm more likely to need money to cover medical expenses and my income may be lower due to working less or not working at all.
In fact, last year, Fidelity said that the average 65-year-old couple would need $315,000 to cover their healthcare costs throughout retirement. And since I'm not close to retirement age, that figure is likely to be higher for me due to inflation. So I'd rather leave my HSA untouched as long as possible.
In fact, when I last checked, my HSA balance was around $7,000. Even if I don't add more money to that account, if I keep that balance invested at an average annual 7% return for 25 more years, it will grow into $38,000. That 7% return is also a fairly conservative one seeing as how the stock market's average annual return, as measured by the S&P 500 index, has been 10% before inflation over the past five decades.
An account I want to make the most of
Not only do HSAs let you save for healthcare in a tax-advantaged manner, but once you turn 65, there's no penalty for taking a non-medical withdrawal from an HSA. In that situation, you simply pay taxes on your withdrawal rather than take it tax free, kind of like a traditional IRA.
And that's another reason I'm eager to accumulate as large an HSA balance as possible. Not only do I want more money saved for healthcare purposes in retirement, but I also like that my HSA can serve as a back-up retirement plan of sorts. So I'm trying to do what I can to not take withdrawals from my HSA if I have other funds I can use to cover my near-term medical bills.
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
Related Articles
View All Articles