4 Reasons to Invest Your Health Savings Account
Many employees use their HSA for deductible expenses. However, a growing number of employees are investing into their health savings accounts (HSA) for retirement. Here are some reasons why:
1. Triple-tax advantage
HSAs are unique in comparison to traditional retirement savings accounts because it is easy to reduce, or even avoid, taxes on HSA contributions and withdrawals. Many High Deductible Health Plans (HDHPs) allow account owners to make pre-tax contributions, similar to Individual Retirement Account (IRA) contributions; this will help lower the owner’s federal income tax as well as grant them the ability to save money untouched by taxes.
HSAs also have tax-free withdrawal benefits of a Roth IRA account. As long as the money goes towards a qualified medical expense, owners can withdraw from their HSAs without worrying about taxes.
Like both IRAs and Roth IRAs, growth in an HSA is tax-free. Owners will not be taxed or penalized for interest earned, and interest earned does not count toward the annual contribution limit. HSA owners can invest cost-free.
2. Annual roll-over
HSAs do not have a “Use or lose it” rule like other savings accounts. The annual balance rolls over from year to year, so the amount of funds in the HSA accumulates. In addition, contribution limits are reset at the beginning of each year; how much the owner contributes to thier HSA in one year should not effect how much the owner can contribute the following year as long as it is below the maximum limit.
3. Ability to invest
Take advantage of opportunities to use your HSA to invest in stocks and high-quality, low-cost investment funds. How much and how aggressively investments should be depends on the HSA owner’s situation, such as how much is currently in their HSA, their age, how many dependents are in their family and their state of health. Some financial advisors recommend more aggressive investing, while others suggest more conservative methods such as investing in high-quality, low-cost investment funds.
4. Penalty-free withdrawals
Although there are penalties for withdrawing from your HSA for non-medical expenses, penalties expire once the owner reaches age 65. After this age, the HSA owner can withdraw from the account for nonmedical purposes without penalties; the only cost would be that the amount withdrawn would be subject to federal income tax, like a pension. Withdrawals for medical expenses remain both penalty and tax-free as well, making an HSA an ideal savings account for retirement.
Interested in learning more HSAs and retirement? Be sure to schedule a consultation with Cambridge via phone or email today.