Health Savings Accounts (HSAs) are amazing investment products for retirement. If you're not using one, you are missing out. I know this may seem odd, but let me explain why.
An HSA, in its most basic form, is intended for medical expenses. It combines the pre-tax benefits of a 401(k) contribution with the tax free growth of a Roth IRA.
Here is the full scoop:
1. MONEY ROLLS OVER EACH YEAR
-Unlike an FSA, the money rolls over if unused in that year. It's not a "use it or lose it" system.
2. CONTRIBUTIONS ARE PRE TAX
- Contributions are pre tax if you contribute through an employer. If you purchased your own plan, they are tax deductible.
3. GROWTH IS TAX FREE
- Probably the best feature!
4. MONEY CAN BE USED FOR MEDICAL EXPENSES AT ANY TIME, TAX FREE
- Just make sure you keep qualifying medical receipts. This essentially gives you a separate medical emergency fund in addition to your regular emergency fund.
5. MONEY CAN BE USED AFTER 65 FOR ANY REASON PENALTY FREE
- However, you will still pay taxes if the money is used for a non-medical expense. Still, it gives you flexibility in your spending if you need to use this money.
6. YOU HAVE TO BE ENROLLED IN A HIGH DEDUCTIBLE HEALTH INSURANCE PLAN TO QUALIFY (AND THERE IS AN ANNUAL CAP TO CONTRIBUTIONS)
- The max contribution amount changes each year. For 2020, it is $3550 for self and $7100 for families.
Want to take your HSA to a new level?
Consider investing all of the money within your HSA account into low cost index funds available (the money is normally held as "cash" within the account unless you specifically go in and invest it). Don't spend the money on medical bills now. Instead, pay for all medical bills as you would any other bill and keep your medical receipts. Keeping your receipts is hugely important, as it gives you the opportunity to reimburse yourself tax and penalty free at any time in the future! Allow your investments to grow. Use the account as another retirement savings account with incredible tax benefits. If you end up needing the money sooner, you can withdrawal money out to reimburse yourself for any qualifying medical expense you have a receipt for.
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