It’s hard enough to motivate yourself to save for retirement, but saving for your future medical expenses? How responsible should a person be?
Fortunately, health savings accounts, or HSA, are tools that make saving for future health-related expenses less painful. These accounts allow you to save money, but they also allow you to invest. With open enrollment coming up, an HSA might be something to consider.
“A cool trick is to invest the money in an HSA like you invest in your IRAsaid Victor Medina, certified financial planner and founder of Palante Wealth Advisors in Pennington, New Jersey, in an email interview.
Investing through an HSA
Think of your HSA as a home for your medical money. Much like a brokerage account or an IRA, you will need to put money into the account before buying investments. Then, after funding the account, you can start investing.
Some HSAs offer tools that help you choose your investments and provide automatic rebalancing, so your portfolio stays within your preferred allocation. Others let you choose from specific investments, such as stocks, bonds, mutual funds, and ETFs.
Whichever method you choose, investing your money through an HSA will likely allow it to grow faster than saving alone. However, if your HSA is offered by an employer, you may have fewer options for investing your money.
Take advantage of the triple tax advantage
Once you start investing through your HSA, you can start reaping the rewards, one of the biggest being the triple tax benefit, Medina said.
“Another neat trick is that the accounts have a triple tax advantage, meaning contributions are tax deductible, growth is tax exempt, and distributions are tax exempt when they are made. used for eligible medical expenses Plus, unlike a 401(k) or IRA, you don’t have to deduct money from the account at a certain age.
If you’re investing in your HSA for the long term, this tax-free growth can make a significant difference in the amount of money you keep.
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Preparing for long-term care
According to data from insurance company Genworth Financial, the median annual cost of a home health aide in 2020 was $54,912; a private room in a retirement home costs about $105,850 per year. Thinking about aging can be difficult for many reasons, including the financial burden that can come with aging. But investing in an HSA can allow you to prepare for these expenses in advance.
If you invested $200 in an HSA every month from age 30 and earned the stock market’s standard annual return of 10%, by age 70 you could have nearly $1.3 million — a significant nest egg for your years. golden.
And while it may be tempting to use your HSA money along the way, Faron Daugs, CFP and CEO of Harrison Wallace Financial Group in Libertyville, Illinois, often advises against it.
“With clients who are generally working and still earning a living, if they are eligible to contribute, I often encourage them not to use these funds on an annual basis, so let them sit and grow almost like you would. in an IRA,” Daugs said.
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Refund later
If you can avoid withdrawing HSA funds as you go, you can reap the benefits later.
“Another trick is to wait much later to take distributions from the account,” Medina said in an email. “You are not required to reimburse yourself in the same year. You are only limited to reimbursing yourself for expenses incurred after the account opening date. So you can pour money into the account, let it grow for decades, and then receive a lump sum distribution in the future that puts money in your pocket tax-free. Be sure to keep receipts of what you paid out of pocket for medical expenses.
Unlike flexible spending accounts, or FSAs, which require you to spend the money within a specific time frame or lose it, HSAs can be rolled over from year to year.
Learn more about HSAs here.
Hack your IRA
According to Daugs, HSAs have a little trick up their sleeve to help people who don’t have a lot of spare cash: you can carry over as much of your annual contribution limit to the CGS for that year ($3,600 for individuals in 2021) from a Traditional or Roth IRA in your HSA.
“It’s available once in your lifetime,” says Daugs. “So let’s take the current example of $3,600. So if you had money in an IRA that was deductible and the money grew tax-deferred in that IRA, you could take up to $3,600 from that IRA, just once in your lifetime. , and transfer it to an HSA account.
The IRA to HSA rollover is a trick you can use if you have unexpected medical expenses and your HSA isn’t as extensive as you’d like.
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And while HSAs have many benefits, they’re not for everyone. Because participants must be on a high-deductible plan to have an HSA, this can be a deal breaker for some. Choosing a health plan during open enrollment will depend on your situation and the options available to you.
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Alana Benson writes for NerdWallet. Email: abenson@nerdwallet.com.
