What Innovative Features of Health Savings Accounts Are Often Underutilized?


    What Innovative Features of Health Savings Accounts Are Often Underutilized?

    Exploring the untapped potential of Health Savings Accounts (HSAs), we've gathered insights starting with a Founder's perspective on using HSAs as a retirement vehicle. Alongside expert opinions, we've included additional answers that highlight innovative yet often overlooked features of HSAs. From the flexibility of investing HSA funds to the ability to cover COBRA premiums, discover the myriad ways to maximize your HSA.

    • HSA as a Retirement Vehicle
    • Invest HSA Funds Flexibly
    • Rollover Feature for Future Savings
    • Purchase OTC Medications Pre-Tax
    • Post-Retirement Tax Deductions
    • HSAs: Investment Opportunities
    • Cover COBRA Premiums with HSA

    HSA as a Retirement Vehicle

    One innovative yet underutilized feature is the ability to use HSA funds as an additional retirement savings vehicle.

    Many HSA participants don't realize that after age 65, they can withdraw money from their HSA for any purpose without penalty, similar to a 401(k) or IRA. Although withdrawals for non-qualified medical expenses are subject to ordinary income tax, effectively using an HSA as a retirement account can provide triple tax advantages: contributions are pre-tax, growth is tax-free, and withdrawals for medical expenses are tax-free.

    Strategically contributing the maximum to an HSA and investing the balance for the long term provides the opportunity for tax-advantaged growth. Even better, unlike other retirement accounts, there are no required minimum distributions from an HSA. Allowing funds to keep growing tax-free can create a sizable sum to cover healthcare costs later in retirement when expenses tend to increase. Tapping this account for medical bills can help preserve other retirement assets as well.

    Brian Meiggs
    Brian MeiggsFounder, My Millennial Guide

    Invest HSA Funds Flexibly

    Self-directing! Most people don't know HSAs can even be invested. This is because most people are only exposed to HSAs through their employers, and those HSAs usually aren't invested in anything. But for those who open their HSAs themselves and have the flexibility to do so, they can invest in stocks (Fidelity has a good platform for this) or even self-direct in things like crypto, real estate, or small businesses (DirectedIRA has a good platform for this). Outside of the above, most people also don't know that an HSA could be used as your long-term care plan. LTC insurance can be quite expensive, but if you're healthy for decades and your HSA goes untouched (or better yet, is compounding in interest), you can leverage it for nursing home care, medical supplies, etc., when you're older. Additionally, if you claim a parent as a dependent, you can leverage your HSA today for those needs on their behalf. We all know HSAs can be used on eyeglasses/ad hoc dental bills, but there's truly a plethora of other options.

    Stephanie Heredia
    Stephanie HerediaCEO, Taxes Tampa LLC

    Rollover Feature for Future Savings

    One of the lesser-known advantages of health savings accounts is the ability for funds to roll over year after year. This means that there is no pressure to spend the money within a certain timeframe, allowing account holders to save for future medical expenses. The flexibility offered by the rollover feature can be particularly beneficial for people who are healthy now but want to prepare for unexpected healthcare costs down the line.

    It also discourages wasteful spending at the end of the year, contrary to the use-it-or-lose-it policies of some other savings accounts. Consider taking a closer look at your HSA and start planning for the long term health expenses right away.

    Purchase OTC Medications Pre-Tax

    Many individuals are unaware that health savings accounts can be used to purchase certain over-the-counter medications without a prescription. This includes a variety of drugs like pain relievers, allergy medications, and first aid supplies. Utilizing an HSA to cover these everyday health items can result in significant savings, especially considering that these purchases are made using pre-tax dollars.

    This often-overlooked feature can make managing out-of-pocket healthcare costs more manageable. If you have a health savings account, ensure you're maximizing its benefits by covering your over-the-counter medication needs.

    Post-Retirement Tax Deductions

    The tax benefits of health savings accounts are widely touted, but many do not realize that these advantages extend beyond retirement. Contributions made to an HSA post-retirement remain tax-deductible, providing a continued incentive to save for medical expenses. This can be a strategic move for those looking to reduce their taxable income during their retirement years.

    As medical costs tend to increase with age, having a dedicated, tax-advantaged fund can significantly alleviate financial stress. Remember to explore this aspect of your HSA as part of your retirement planning process.

    HSAs: Investment Opportunities

    Understanding the investment potential of health savings accounts is vital for those looking to optimize their healthcare savings. HSAs are not just a way to pay for current medical expenses; they can also be leveraged as investment vehicles. The money within an HSA can typically be invested in various options such as stocks and mutual funds, potentially growing your savings at a much faster rate than a regular savings account.

    As healthcare costs rise, having an investment strategy for your HSA can provide a sizable financial buffer. Look into your HSA’s investment options and consider if they align with your financial goals.

    Cover COBRA Premiums with HSA

    A practical yet often overlooked aspect of health savings accounts is their ability to cover the premiums for COBRA, the program that allows individuals to continue their employer-sponsored health coverage after leaving a job. This can be a lifeline for those who are in between jobs and wish to maintain their coverage without interruption. Utilizing HSA funds for COBRA premiums can provide financial relief during what can often be a stressful transition period.

    As healthcare continuity is crucial, remember that your HSA can serve as a financial bridge. Check your HSA provisions to see if this could be a viable option for you in times of employment change.