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Don’t Overlook an HSA as a Critical Wealth-Building Tool

Don’t Overlook an HSA as a Critical Wealth-Building Tool

March 10, 2021

Tom Torre, CEO and co-founder at Bend HSA

When it comes to your short and long-term financial goals, choosing the right type of investment account can be just as important as choosing your ideal asset allocation and other strategic details. And when it comes to your tax-advantaged investment account options, you can’t afford to overlook the wealth-building potential a health savings account—commonly known as an HSA—offers.

If an HSA doesn’t even register a blip on your radar when thinking about investment account options, you’re not alone. Many individuals—even seasoned investors—aren’t fully aware of an HSA’s wealth-building potential. Health savings accounts by and large tend to be relegated to the background as an afterthought associated with health insurance.

But that’s changing—and at a fairly rapid pace. More and more savvy investors are realizing HSAs are more than just 12-month health spending accounts and reaping the rewards of turning their HSAs into powerful, long-term investment vehicles.

A Quick History of HSAs, and Who’s Eligible

Health savings accounts are still relatively young in the market. Introduced as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, HSAs were created as a means for individuals and families covered by high-deductible health plans (HDHPs) to be able to save money and receive important tax advantages on eligible healthcare expenses.

Since the early 2000s, the landscape of healthcare has been changing, turning to a more consumer-driven model. With continually rising healthcare costs, coupled with the higher deductibles associated with HDHPs, HSAs were designed to bridge the gap as an efficient way to save and pay for current and future healthcare expenses in a more streamlined approach than other limited healthcare account systems, like flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs).

Since the early 2000s, the landscape of healthcare has been changing, turning to a more consumer-driven model. With continually rising healthcare costs, coupled with the higher deductibles associated with HDHPs, HSAs were designed to bridge the gap as an efficient way to save and pay for current and future healthcare expenses in a more streamlined approach than other limited healthcare account systems, like flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs).

The introduction of HSAs provided consumers of all kinds with a new way to take control of their own healthcare costs while receiving multiple tax advantages on contributed funds, plus a variety of other benefits—including the unique ability to invest HSA funds.

The requirement to be eligible to open an HSA is simple and straightforward—you need to be enrolled in an HSA-eligible HDHP. For 2021, HDHP plans with a deductible of at least $1,400 for individuals and $2,800 for families qualify.

Keyword: Savings

Early on, HSAs experienced a slow start in the market. But with each year that passed, more and more people began to take note of the many advantages choosing an HDHP/HSA option provided. So much so that for the past few years, HSA-eligible health plan enrollment has grown, and is projected to continue to grow, by more than 25% annually. And HSA accounts are on pace to exceed 30 million by 2022.

Today, individuals, employers, employees, financial analysts, advisers and just about everyone else has recognized the powerful role HSAs play in our modern healthcare system.

But while the importance of health savings accounts as they relate to health insurance can’t be understated, the wealth-building investment potential of having an HSA has continued to be mostly overlooked.

The key difference that separates HSAs from other tax-advantaged healthcare accounts is the word “savings.” Unlike limited spending accounts like FSAs and HRAs meant to be spent down each year, health savings account funds can be rolled over year after year and benefit from a triple tax advantage that plays into long-term investment potential.

With an HSA, your contributions aren’t taxed, all withdrawals for qualified expenses are tax-free and your funds grow tax-free. You read it correctly—with an HSA, your investment gains are truly tax-free. An HSA is the only account that can help you build equity for future healthcare and other expenses in such a tax-advantaged manner. Period.

Maximize Your Investments by Maximizing Your Contributions and Your HSA Strategy

So, how do you execute an HSA investment strategy that nets the best results? Follow these four simple steps:

  1. Maximize your tax savings by maxing out your annual HSA contributions Contributing the maximum annual limit to your HSA will give you the most significant tax savings upfront, while also adding the most money to your HSA to save and invest for the long term. Simply put, the more you contribute to your HSA, combined with the tax-free growth of your HSA investments and interest, the more you build equity and set yourself up to be able to fund your future healthcare—and perhaps other—expenses exclusively through your HSA.
  2. Invest all your HSA funds and pay for your healthcare expenses out of pocket By paying for all your healthcare expenses upfront out of pocket and leaving your HSA funds untouched, your investments continue to grow uninterrupted and tax-free. The power of compound growth is a beautiful thing.
  3. Save your receipts for future reimbursement With an HSA, there’s no time limit for reimbursement of any qualified expense as long as your HSA was open at the time it was incurred. That means you can let your investments continue to grow tax-free, and still cash in on additional tax savings whenever you choose to be reimbursed—even if it’s years or decades later. Just be sure to keep good records so you can substantiate any future reimbursements if needed.
  4. Use your HSA just like any other retirement account once you turn 65 Best of all, once you’re 65, you can use your HSA funds for anything you wish—not just qualified healthcare expenses, without penalty. No minimum distributions are required. And when you consider that a married couple will on average need $295,000 for healthcare expenses alone throughout retirement, you can quickly see just how critical it is to leverage your HSA’s wealth-building potential sooner rather than later.

HSAs Provide the Flexibility and Portability You Need, Now More Than Ever

Along with an abundance of untapped investment potential, health savings accounts also offer unmatched flexibility and portability.

You own your HSA and it’s yours to keep and use no matter what—even with a job change, insurance plan change, retirement or otherwise. And as long as you’re enrolled in a qualified HDHP, you can continue to make contributions up to the maximum annual limit. With an HSA, you can also change your contributions on the fly quickly and easily, as many times as you choose.

There’s also no “use it or lose it” with an HSA. Your funds roll over indefinitely without penalty and can be used for a wide variety of healthcare costs now and into the future, including over-the-counter medications, feminine care products and many other expenses you might not think would be eligible.

And remember, with an HSA, there’s no time limit on reimbursement as long as the expense is HSA-eligible and was incurred while your HSA was open. That means there’s no need to panic even if you come up against a healthcare expense that falls outside of what you’d initially planned for—you can always submit your qualified expenses at any point in the future if you need to be reimbursed through your HSA. Or you can pay with your HSA immediately if that makes the most sense.

Choose the Right HSA Provider to Optimize Your Results

Another great aspect of health savings accounts is that where you open your HSA is your choice. There’s no restriction on who you choose as your HSA provider. In fact, you can even choose to open more than one HSA if you so desire.

But be aware—not all HSA providers are created equal.

With the HSA industry still being in the growth phase, HSA offerings tend to vary substantially since they’re not yet as standardized as other types of investment accounts. From fees and deposit security, to opportunities for investment account growth and overall ease of use, it’s important you take the time upfront to find the best HSA fit for you, so you’re not stuck with a less-than-stellar account that’s cumbersome to manage and loaded with fees and other limitations.

For more information on all things health savings account, check out these HSA resources. And if you want an industry-leading HSA that makes maximizing your HSA benefits and long-term wealth-building potential quick and simple regardless of your level of HSA knowledge, look no further than Bend.

This article was written by and presents the views of our contributor, not necessarily that of Wealthramp.

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