Do You Know How to Use Your Health Savings Account As a Useful Investment Vehicle? We Tell You How
You could learn a thing or two from the many nifty financial planners out there. One helpful hint is that you can reap some attractive tax benefits by maxing out on your health savings account. In fact, your HSA could actually be one of the more beneficial investment vehicles for your retirement planning!
What’s an HSA?
A health savings account is typically called an HSA, and it is a type of account specifically designed for the payment of healthcare expenses. HSAs come with tax advantages and because of these advantages, contributing to your existing HSA and using your HSA for the payment of qualified medical costs actually gains you considerable discounts on your medical bills.
Do You Qualify for an HSA?
This is a fair question because not everybody actually qualifies for an HSA. The main requirement for you to be an eligible candidate for an HSA is that you are covered by an HDHP or a High Deductible Health Plan. This is a scheme that requires that you make a payment for a considerable fraction of your healthcare bills upfront before insurance comes to the rescue. In order to qualify for an HSA, you must pay the first $1350 at minimum, and a maximum of $6650. These costs can be paid using the balance on your HSA, which is good to know.
Your Health Matters
The principal purpose of your HSA is for the payment of medical costs, but if you wind up eating through your entire HSA balance every annum, then you aren’t taking advantage of the long-term benefits of holding a balance. In the event that you are depleting your funds each year, your HSA cannot be considered an investment vehicle.
Why Max Out On Your HSA?
The tax advantages for an HSA are so attractive that financial planners often advise clients to actually max out on their HSA contributions before they even look at contributing to an IRA. The advantages are tax deductions for your contributions to the fund, and that you aren’t eligible for a tax upon withdrawal so long as the money is used to pay qualified healthcare costs or qualified healthcare premiums if you are above 65 years old. In contrast, an IRA offers one or the other benefit, not both.
Since 2018, your contributions are set at a maximum of $3450 or $6900 for families. These are the same limits that happen to qualify for tax deductions. Similar to other retirement savings vehicles, these limits do adjust with fluctuations in inflation. If you happen to reach the maximum, you may then start contributing to an IRA, or a 401K or other investment vehicle with attractive benefits. In addition, like other retirement funds, you are given an added $1000 in catch-up contributions when you reach 55 years old.
Like other retirement accounts that feature tax benefits, if the funds in your HSA are used for anything other than medical costs, the IRS will be sure to dish you out some penalties. Your HSA funds are there to be used for qualified medical expenses, and if you happen to use the funds on anything that does not qualify as a medical expense, you do pay income tax upon withdrawal and a 20% penalty. This adds up to almost 50% or maybe more in penalties and taxes, should you make use of these funds in any other way other than its purpose. When you are 65 years old though, you can use the money for other purposes and pay only ordinary income tax.
How It’s Invested
One particularly important factor to consider is the company that will be holding your HSA funds. If your funds are to be contained in nothing more than a basic savings account, then there is little benefit to maxing out n your HSA fund as the funds will not be invested. Some companies actually do allow the funds to be invested, offering an opportunity for more aggressive growth than a regular savings account. It is when your HSA comes with this investment option that it acts as a vehicle for effective wealth building.
If you do end up with an HSA it can be used to grow your wealth for a comfortable retirement one day. However, do not make the mistake of forgetting about it, and constantly keep update don the information of your HSA throughout your enrolment.
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