If you’ve been to the doctor lately or filled a prescription, you know how expensive healthcare costs can be. If you have a health savings account, or HSA, you have access to a powerful tool that can make your expenses more manageable.
When you decide on a health insurance plan, you have the option of choosing one with a low deductible and high premiums, or with a high deductible and low premiums. People who are in relatively good health typically opt for the plan with the lower premium, which means they often have high deductibles. These plans have one advantage that helps offset their costs: HSAs.
An HSA is an account from which to pay for qualified medical expenses. You’re eligible for an HSA only if you’re enrolled in a high-deductible health plan, which means your deductible is at least $1,350 for plans that cover one person. With an HSA, you can make contributions to your account throughout the year, up to $3,450 for a plan that covers one person.
Contributing to an HSA has significant benefits. Your contributions are tax deductible, meaning you can reduce your taxable income. Withdrawals used to pay for qualified medical expenses aren’t taxed, and any investment growth isn’t taxed either.
Unlike flexible spending accounts, which have spending deadlines, HSA funds roll over from year to year. If you know you’ll have a major medical expense in the coming years, you can use your HSA to save for that event. There’s no required minimum distribution you have to take, so you can roll over the full amount.
Despite the advantages, you may think setting aside such a large chunk of change for medical expenses is limiting. But an HSA is more flexible than you think. You can use it for a wide variety of purchases beyond just prescription medications, including:
1. Prescription sunglasses: Your eye exam, prescription glasses, and contacts are all qualified expenses under an HSA. But you may not realize you can also use your HSA to cover the cost of stylish prescription sunglasses.
2. Dental care: Dental care can be prohibitively expensive, even if you have dental insurance. An HSA can help cover the cost of necessary dental procedures, such as fillings, root canals, and crowns. Cosmetic procedures, such as teeth whitening, are not qualified medical expenses for an HSA.
3. Fertility treatments: Fertility treatments are financially out of reach for many families. But people struggling to conceive can use their HSA to save for fertility treatments such as in vitro fertilization, helping make the treatments more affordable for regular families.
4. Mental health: If you plan to see a therapist for mental health problems such as anxiety or depression, your HSA will help you cover the cost.
5. Some home improvements: If you or a family member needs a modification to your home for medical reasons, such as adding a ramp or widening a doorway to accommodate a wheelchair, you can use your HSA for those expenses.
Perhaps one of the most significant ways to use an HSA is to help fund your retirement. According to some studies, it will cost a married couple retiring at age 65 $280,000 to cover medical costs. Funding your HSA and saving it for retirement can help pad your retirement savings.
If you wait until you’re 65 to withdraw money from your HSA, there is no penalty for using the money for expenses other than medical costs. You can then use your HSA like you would any retirement savings account. Your withdrawals would only be taxed at the normal income tax level. It’s a great way to increase your retirement savings if you’ve maxed out your 401(k) and IRA, giving you another tool to save.
To take advantage of this strategy, contribute the maximum to your HSA every year. If at all possible, avoid taking any withdrawals from your HSA to pay for medical expenses. Instead, use cash to cover the costs out of your own pocket. Treat your HSA like you would any retirement account, setting up an investment mix that matches your 401(k) or IRA so that the money can grow accordingly. Once you’re 65 and can access Medicare, then you can start making withdrawals from your HSA.
HSAs are a great advantage of high-deductible health plans, and by thinking outside the box, you can maximize their value.
Kat Tretina is a freelance finance writer based in Orlando.
