When Health Savings Accounts (HSAs) were introduced in 2003 as a way to help those with high-deductible health plans save for medical expenses, the new tool was met with some confusion and skepticism. But as time has gone on, acceptance has become more widespread — HSA enrollment increased 53 percent between 2013 and 2016, according to a survey by United Benefits Advisors.
You can use HSAs to pay for a variety of medical expenses that may not be covered by your insurance. These include co-pays and co-insurance; some alternative health care treatments, such as acupuncture and chiropractic care; as well as vision care, dental expenses, and even hearing aids. You can also use HSA funds to pay for some insurance premiums, such as long-term care premiums.
How big have HSAs grown? A study by one firm estimated that by 2018 HSAs were likely to hold $52 billion in assets, up from $30.2 billion in 2015. And some of the reason for the growth may be that investors are catching on to the benefits an HSA provides beyond saving for medical expenses.
Beyond health care
The real allure of HSAs is generally the potential tax benefits, says Paul Sowell, Senior Wealth Planner at Wells Fargo Private Bank.
"The tax benefits of HSAs are heavily weighted toward high-income earners," he says.
The income used to fund HSAs is tax deductible — up to $3,400 per year for individuals and $6,750 for families, although those figures may change if Congress passes a new health care law. You can invest the funds inside an HSA, so they have the potential to grow more — also tax-free. That tax-free distinction is different from a tax-advantaged account like a 401(k), because the money from an HSA isn't taxed if it's withdrawn as long as it's used for approved health care expenses.
The benefits of HSAs can be especially appealing to high-income earners. That's because those with more assets can afford to contribute the maximum amount toward an HSA, taking greater advantage of the tax benefits and capitalizing on the compound growth opportunities available.
Similar to other investment accounts, money in an HSA can be invested in stocks, bonds, and other securities. Sowell recommends considering HSAs like other investment accounts: make investments based on your long-term financial goals, risk tolerance, and liquidity needs. For example, do you anticipate needing HSA funds to pay for medical expenses in the short term?
To open an HSA, you must be insured under a high-deductible plan with an annual deductible of at least $1,300 for an individual or $2,600 for a family. HMO and traditional PPO plans don't qualify, Sowell says.
But that still leaves many employees and self-insured people eligible. According to a 2016 survey of employers, about 31 percent offer HSAs to their workers and another 15 percent of employers said they were likely to offer them by 2018.
Similar to other investment accounts, money in an HSA can be invested in stocks, bonds, and other securities.
A boost for retirement
Besides the tax advantages, HSAs are portable. Once you've funded an account, it can follow you to your next job, Sowell says. And unlike flexible spending accounts (FSAs), where you must use the money before the end of the year or lose it, HSA money is yours to keep until you spend it.
HSAs can also function like secondary retirement accounts, allowing you to sock away a bit more in savings.
Here's how that works.
Eligible consumers can deposit money in HSAs, tax-free, until they turn age 65. At that point, they can no longer make deposits, though the balance can still grow through investment earnings. Consumers over age 65 can withdraw as much or as little as they like.
Money that's withdrawn for qualified health care expenses, Sowell says, is still tax-free. After age 65 there's another bonus: You can withdraw money to use for non-health care expenses, in which case it's taxed at the account owner's normal income tax rate, with no penalties.
"It's similar to an IRA," Sowell says. "Once you pull money out, you pay your income tax."
Sowell stresses that if you have the cash flow, an HSA can be a smart tool for both medical expenses and tax-advantaged investments.