Wealth column: If you aren't retired, keep your hands off your HSA
Before you get too upset by our headline, hear us out. We are in no way saying not to have an Health Savings Account (HSA) or to never use it, but we are saying to save your HSA dollars for after you retire. To start, here's exactly what an HSA i...
Before you get too upset by our headline, hear us out.
We are in no way saying not to have an Health Savings Account (HSA) or to never use it, but we are saying to save your HSA dollars for after you retire.
To start, here's exactly what an HSA is.
An HSA is a savings account available to people with a High Deductible Health Plan (HDHP) and gives those individuals the option to put aside tax-free money to cover medical expenses. These contributions are made before tax, so owners get a tax benefit off the bat as well as later on when health care needs arise and that money can be used tax-free for qualified expenses. These are also accounts that the owner gets to keep forever, unlike a flexible spending account.
If you don't have an HDHP, are enrolled in Medicare or are considered a dependent on someone's tax return, you are unfortunately unable to open an HSA. But if you are eligible, we highly recommend opening one of these tax-friendly accounts and contributing regularly.
If you've stayed with us this far, you're probably wondering why on Earth we'd tell you not to use that account until you are retired. There are a couple reasons, but especially because of one little rule that applies to HSAs. Once you reach age 65, you can use your HSA savings as if it were an IRA for any expense, and still get the tax-free benefit for qualified medical expenses.
This means that if you suddenly spring a leak in your water heater at age 67, you can use the money that has been building in your HSA to cover that costs and only pay regular income tax on that withdrawal. By waiting until age 65 or later to tap into that HSA, you not only create what is essentially a secondary emergency savings fund, but you've given that fund potentially decades to grow.
Compounding interest plays a major role in retirement savings, as most of us know. So if you open an HSA at age 30 and don't use that income until age 65, you've given your money 35 years to grow and earn a return on itself over time. These accounts can help fund the costs of long-term care (or certain long-term care insurance premiums), medication and many other medical necessities that you may come across. And it's well documented that health care costs are climbing. Saving that HSA money for later in life can mean using that growing, compounding interest to help pay for those health care costs that will also be rising as you age.
Now, if you come into a medical emergency and you need to find a place to help pay for an operation, medication or therapy, by all means please use your HSA funds to help cover your bills. The HSA is a great saving vehicle for medical expenses throughout your lifetime. But if it's possible, waiting until retirement to use your HSA dollars could help you to be more confident about your physical and financial future.