Saving money is often mentioned as one of the core steps toward financial success. Also important is deciding where to save money, as there are numerous options to consider. 401(k)s, IRAs, Roth IRAs, nonqualified accounts and others all have their own rules, benefits and tax implications. Among all of these, though, there is one account that may be the most valuable and, at the same time, the most overlooked: the health savings account (HSA).
An HSA is a tax-advantaged way to save money to pay for qualified medical expenses. It is available for people who are covered by a high-deductible health insurance plan and, similar to 401(k)s and IRAs, HSAs do have contribution limits set each year. While many high-income earners may find themselves ineligible for a Roth contribution or IRA deduction, HSAs have no income limits on who can contribute.
Since it is only available to those with high-deductible health plans, you must first make sure that type of health insurance best fits your situation. Ideally, high-deductible plans are for those with low health care needs, and since your health may one day dictate that a high-deductible plan is not in your best interest, it is all the more important to take full advantage of an HSA while you can.
When people think of the HSA, seldom do they think of retirement savings. Often it is used instead as a source of funds for current health care costs to be withdrawn and spent each year. This can lead to a significant missed opportunity. Unlike a flexible spending account (FSA), where funds have to be spent by the end of the year, HSAs allow account balances to roll over into future years. Because of this, along with the tax benefits and flexibility that an HSA offers, it becomes an ideal long-term investment account. Being more specific, the HSA becomes a perfect account to view as a medical retirement plan.
The HSA Offers Second-to-None Tax Benefits
A major feature of the HSA that sets it apart from other accounts is its tax benefits. Many of us are familiar with the tax savings that come with 401(k) contributions. Contributions are tax-deductible, giving us tax savings in the years that 401(k) contributions are made. This tax incentive is offered, in part, to encourage people to put enough money away for retirement. Likewise, investments promote economic growth. Therefore, as a matter of policy, the federal government offers numerous tax incentives to encourage people to save money.
Various accounts, especially retirement accounts, offer some form of the following: a tax-deduction on contributions, tax-deferral on growth, and/or tax-free withdrawals. Annuities, for instance, offer tax-deferral on growth, while most retirement accounts offer a combination of …….