For many years, my family was covered by a low-deductible health insurance plan. In fact, we were pretty spoiled because our insurance plan didn't even require us to pay a deductible for in-network services.
Last year, however, we had to switch plans and wound up on a high-deductible insurance plan for the first time ever. While that's been a bit of an adjustment, one neat perk to come out of it has been getting access to a health savings account, or HSA.
The great thing about HSAs is that they're extremely flexible -- far more flexible than actual flexible spending accounts (FSAs). That's because HSAs let you carry your money forward indefinitely, whereas FSAs generally require you to spend down your plan balance within a year or risk forfeiting untapped funds.
Plus, unlike FSAs, HSAs let you invest the money you don't need to use right away. And any gains you enjoy in your HSA are tax-free, as are withdrawals used for qualified medical expenses.
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At this point, I have a decent chunk of cash sitting in my HSA due to having maxed out my contributions last year when we became eligible to fund that account. And that's a good thing because my healthcare costs this year are already soaring, even though we're only about a month into 2023.
While I have the option to take a withdrawal from my HSA to cover my near-term bills, I refuse to do so. In fact, if I have it my way, I won't be touching my HSA for a long, long time.
It pays to leave your HSA alone
You can take a penalty-free withdrawal from an IRA or 401(k) plan starting at age 59 1/2. But if you're not retiring for another 10 years, it pays to leave that money alone and let it continue to grow in a tax-advantaged manner. The same concept applies to HSAs.
Sure, I could take a withdrawal tomorrow to cover the $400 medical bill I just received in the mail. But if I don't withdraw that $400, I can leave it invested. And hopefully over time, that $400 will grow into a much larger sum.
In fact, my goal is to not withdraw so much as a dollar from my HSA until I'm actually retired. The way I see it, I don't know exactly how much retirement income I'll have at my disposal. Social Security could get cut, leaving me with a smaller monthly benefit. And while I'm working hard to build savings, it's hard to know how much money I'll be comfortable withdrawing yearly from my retirement plan.
Meanwhile, I know healthcare tends to be a huge expense for seniors, and I don't expect to be the exception to that rule. So I'd rather reserve my HSA funds for healthcare bills in retirement, when money could end up being tighter. That means paying for medical bills out of my pocket right now, even if I have to cut spending in other expense categories to make that happen.
I want the most flexibility
Tempting as it's been to tap my HSA for recent healthcare bills, I'd rather leave that money alone so it's there for me at a time when I might need it even more. Plus, the great thing about HSAs is that once you turn 65, you can take a withdrawal for non-medical purposes and not be penalized. All that happens in that case is that you pay taxes on your withdrawal, whereas for healthcare spending purposes, you don't.
Either way, carrying a robust HSA balance into retirement is something I'm very eager to do. Because of this, I'd rather find a way to cover my near-term healthcare bills, whether by spending less on travel, cutting some luxuries like weekly takeout meals, or even pushing myself to work more and boost my income.
