It’s unfortunate that not everyone has access to a health savings account, or HSA, because these savings plans really offer a multitude of benefits. On the one hand, HSA contributions are tax exempt, and therefore maximizing one could result in significant tax relief in the short term.
HSAs also allow you to invest all the money that you don’t need immediately for health care purposes. And any winnings you get on your account are not subject to tax.
Additionally, HSA withdrawals can be made tax-free as long as they are used to cover the cost of eligible medical expenses. And while there are stiff penalties for withdrawing funds from an HSA for non-medical purposes, once you’re 65, you can actually make an HSA withdrawal for any reason without penalty. You will be taxed on your withdrawals in this scenario, but it’s no different than receiving distributions from a traditional IRA or 401 (k) during retirement.
But a recent report from the Employee Benefit Research Institute found that 91% of HSA owners don’t actually invest the money in their accounts. Rather, they keep their balances in cash. And this is a major mistake.
Cultivate this balance
If you have an HSA, you might be tempted to use your account when medical bills arise. But in fact, a better strategy is to pay your health care bills right away if you can and keep as much money as possible in your HSA. That way, you can invest that money and enjoy the tax-free gains we just talked about.
Now, you may be hesitant to invest any money in your HSA, either because you don’t know how or because you are afraid of taking losses. But if you make an effort to leave your HSA funds alone and keep that money invested until retirement, you could end up with a sizable amount of money at your disposal.
This is important because Fidelity estimates that the average 65-year-old opposite-sex couple will spend a staggering $ 300,000 on health care in retirement today. Reading between the lines, if you’re retiring with a host of pre-existing health issues, you could be spending even more.
Having the cash available in an HSA could make your medical bills more manageable. But if you want to retire with a bunch of money in your HSA, then investing your savings is the way to go.
In fact, it pays to treat an HSA the same way as a traditional retirement savings plan like an IRA or 401 (k). Your goal should be to invest in a way that outstrips inflation and keeps your purchasing power in the face of rising costs – something Social Security has long failed to do.
In this regard, invest in a S&P 500 Index Fund is a good bet. S&P 500 index funds don’t require you to do a lot of research, but they do to do allow you to benefit from large market gains.
Get the most out of your HSA
If you’re going to put money into an HSA, don’t just leave it in cash. Go this route and you might have a hard time developing your balance. Instead, be careful not to use your HSA for as long as you can and invest your money in the meantime. You’ll be thankful you did once those medical bills start pouring in during retirement.