The Health Savings Account or HSA is a tax advantaged investment vehicle for the primary purpose of saving for future medical expenses.
The HSA allows you to contribute pre-tax dollars, the funds grow tax FREE and are withdrawn tax FREE so long as the funds are used for qualified medical expenses.
It is the ONLY investment vehicle available with this “triple tax advantage.”
Not only can a Health Savings Account be a valuable and meaningful tool to save for future medical costs, but it can also be used as another form of retirement savings….read on!
Again, in order to be eligible to contribute to a Health Savings Account, you are required to be enrolled in a high deductible health insurance plan.
A high deductible plan typically has lower premiums, but higher deductibles.
So if you have a high deductible plan through your employer, your bi-weekly payments towards your health insurance (premiums) will be lower than had you chosen a PPO plan. However, in the event that you require significant medical attention, your deductibles will be higher to reach and thus requiring you to pay more out of pocket until insurance kicks in.
High Deductible Plans are typically most appropriate for those who are in good health, not expecting large medical bills and do not make frequent trips to the Doctors. In addition, it makes sense for those who are willing to take on the higher risk in assuming their medical costs will be predictably low in the coming year.
Individuals with significant wealth are also good candidates for the high deductible plans & HSA combo. They will be able to reduce their taxable income by maxing out their HSA, benefit from the tax free growth of funds, and meanwhile have the means to afford out of pocket medical costs should they arise.
In my opinion, both high net worth individuals and individuals who are in their 20’s and 30’s, in good health and without children would be ideal candidates for the high deductible plan in combination with contributing to an HSA.
Why? Because their understanding of the account is that its purpose is to pay for medical expenses. So why would one invest when they plan to use the funds year after year for ongoing medical expenses like doctors visits, prescription medications, etc.?
Well, what they don’t realize is that instead of using the funds for minimal medical expenses here and there, they could be investing and allowing the account to grow tax free for years! And that the account could be used on significant medical costs and/or for tax deferred retirement funds in the future.
**If your company is offering a match into your HSA, this should be another huge motivator for you to contribute at least up to their match percentage!**
Beneficiary Note*** By putting your spouse as the beneficiary of your HSA, the HSA will continue to honor its tax free status upon transfer to spouse. If you put a non-spouse as the beneficiary of the HSA, the HSA will become taxable to the beneficiary in the year of death.
Check out the two other tax free investment vehicles for your future from the blog – 529 College Savings Plans & Roth IRAs!
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