We are only given one physical body in our lifetime, so it is up to us to nourish and maintain it. It is up to us to make the effort to eat healthy and stay healthy. If we don’t, it will eventually catch up to us and we’ll struggle much more in our older years. We’ll lose the ability to perform more physical activities or enjoy time with our loved ones. We’ll lose our ability to work or vacation at our fullest. Although some things are inevitable, we still have a chance at staying healthy into our older years if we make the right decisions starting right now. Similarly, I believe that we need to make the right financial decisions that will benefit our health down the line. Regardless of the election results and the political climate, I believe that it is necessary for us to think about how to make the best financial decisions for our future. Therefore, I highly recommend getting an HSA account if it is available through your health insurance provider.
What is an HSA account?
An HSA account or Health Savings Account is a vehicle that allows you to store money that is directed specifically at healthcare expenses. You hold on to it for the rest of your life and use it whenever you have appointments, operations, or need to buy prescription medicine. It’s an account that allows you to grow your money when you are young and healthy and then spend it when you are older. In practice, you would carry around an HSA debit card that you can use when you purchase prescription medication or go to the doctor’s office.
What are the advantages?
You may be asking, why use an HSA account instead of just a regular bank account? Well, there are multiple advantages to using an HSA. First, you can fund it with pre-tax dollars. You can defer a portion of your paycheck before it gets taxed to your HSA account. As a result, you avoid taxes on that portion of your paycheck, which allows you to more quickly accumulate funds. When you spend your HSA money, you don’t need to pay income taxes if you take out money for qualified healthcare expenses either.
You can also allocate a portion of your HSA account just for investments. You can invest your HSA money into a variety of stocks and funds. As a result, you allow your money to compound over time. In fact, your money can grow tax-free within the HSA account. When you are young and healthy, you can invest more of your money in your HSA into an exchange-traded fund since you presumably don’t need to spend as much money on your health. You can increase your investments every year as you contribute to your HSA. Over the course of twenty or thirty years, that money can accumulate to a substantial amount especially if it is growing tax-free. At that point, you’ll have a lot of money left over to use for healthcare expenses in retirement. You’ll have the security of a large sum of money to cover your medical expenses.
What are the limitations?
Well, obviously there will be some limitations with a tax-free investment vehicle. An individual can only contribute up to $3350 for 2016, whereas a family can contribute up to $6750. The government can’t have us avoiding too much income tax since they need to collect their tax revenue. You are also limited to spending your HSA distributions on qualified medical expenses, otherwise, you’ll incur a 20% penalty. The purpose of this account is for healthcare expenses, therefore the government incentivizes you to use it for healthcare purposes only.
An Added Benefit
Although the HSA is meant for healthcare expenses, once you hit 65, you can take distributions for other expenses and pay your ordinary income tax rate on that distribution amount without incurring a penalty. So essentially, it will resemble a Traditional 401K once you reach 65 with the added benefit of avoiding income tax if you are spending your money on qualified medical expenses. This right here is another major reason to invest in your HSA. It can double as a 401K in your older years so you can use it for other expenses as well assuming you are willing to pay the ordinary income tax.
Do you currently use an HSA or have you considered getting one?
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