Here’s the best way to use a health savings account, which offers a triple-tax advantage
Health savings accounts can be a powerful way to build wealth and prepare for medical costs in old age — if they're used the right way.
HSAs carry a three-pronged tax benefit. Contributions and investment growth are tax-free, as are withdrawals if used for qualified health expenses.
Even if a withdrawal isn't health-related, the account owner would only owe income tax on those funds — in effect turning the HSA into an account with tax benefits akin to a traditional 401(k) plan or individual retirement account.
«I almost don't think of them as health savings accounts, but profoundly tax-beneficial retirement accounts,» said Andy Baxley, a Chicago-based certified financial planner at The Planning Center.
The ideal way for savers to use HSAs is by contributing the annual maximum, investing the money and paying for present-day health costs out of pocket via other savings, according to financial advisors.
This allows time for HSA money to grow tax-free. HSA investments are like those in any other retirement account, with diversified stock and bond mutual funds, for example.
Most people don't invest their HSA savings, however. They instead use HSAs like a bank account and withdraw cash as needed to pay for current medical costs.
Just 9% of accountholders were investing a portion of their HSA balance in 2020, according to the Employee Benefit Research Institute. The remainder — 91% — held their full balance in cash.
But this offers virtually no upside growth — a disadvantage when health costs in retirement are expected to be about $300,000 for the average couple who retired in 2021, according to a Fidelity Investments estimate.
The IRS outlines a wide variety of qualifying HSA health costs, like those associated with dental
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