Katie Martin, CFA, CFP®
September 3, 2021
After a long, hot August, I am ready to turn the page to September! Soon we’ll see the telltale signs of fall – football games, changing leaves, ripening apples – which means open enrollment season for employer benefit plans is right around the corner. Ok, so maybe signing up for your benefits doesn’t rank super high on your list of favorite fall activities, but it’s an important part of your family’s financial well-being.
If your employer offers a high-deductible health insurance plan, you may be eligible to enroll in a health savings account (HSA.) (First, it’s important to weigh whether a health insurance plan with a high deductible is appropriate for you or your family.) An HSA is a special kind of savings account that allows you to set aside pre-tax money to pay for qualified medical expenses. HSAs can feel a little confusing, so in advance of this year’s benefit enrollment, I wanted to share some questions I commonly receive from my clients.
What’s the benefit of putting money into an HSA?
HSAs are one of the most tax-advantaged investment accounts there are since they have three tax advantages: 1.) The money you contribute to an HSA comes from your pre-tax income, so it lowers your taxable income today. 2.) The money in the account grows tax-free. 3.) If used for qualified medical expenses, the funds in the account can be withdrawn tax-free.
What happens if I don’t use all of the money I put into my HSA?
HSAs often get confused with flexible spending accounts (FSAs.) With such similar names and acronyms, it’s easy to see how this can happen! With FSAs, you must use all the money in the account by the end of the year or it is forfeited – so basically, you use it or lose it. A great feature of HSAs is that any unused funds you have at the end of the year roll over to the next, so you don’t have to worry about losing what’s saved in the account. It’s your money to hold onto until you need it.
You can withdraw the money at any time for medical expenses. Once you reach age 65, you’re able to withdraw the money for purposes other than medical expenses. However, you will pay tax on the withdrawals if they aren’t for qualified medical expenses (which makes it work like other kinds of retirement accounts, such as 401(k)s and traditional IRAs.)
Can I invest the money in the account?
Yes. Since an HSA can serve as a long-term savings vehicle, you are able to invest the money in the account. Now, the money in an HSA is typically set aside to help meet your health care expenses, so it’s important to keep that in mind when deciding whether it’s appropriate to invest any of the cash you have in the account. However, if you build up a balance over time that exceeds what you might need to cover short-term medical needs, then you may choose to invest a portion of the cash to hopefully generate better longer-term returns.
What happens if I leave my employer?
Your HSA belongs to you – not an insurance company or your employer. While you may have established the account through your employer, it is your money and goes with you if you leave your job.
HSAs have several advantages, so I like to make sure clients have a good understanding of what they are before deciding whether they’re appropriate for their personal situation. Please consider reaching out to your benefits area or a trusted financial advisor if you have any questions navigating your benefit choices during this upcoming open enrollment season. Happy Fall!
This blog post is intended for general information only and should not be construed as personalized investment, legal, or tax advice. The information is based on sources believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Statements made in this blog may be subject to change depending on revisions to the tax code, statutes, regulations, or government policy. Please consult your accountant, attorney, or financial advisor prior to engaging in any legal, investment, or tax strategy.