While health savings accounts (HSAs) hold remarkable potential to aid Americans in preparing for future healthcare expenses, a significant number of account holders fail to invest their HSA funds. This lack of investment can deprive individuals of substantial financial growth over time, potentially costing them thousands of dollars or more. It’s crucial to understand how to effectively leverage these accounts for maximum benefit.
HSAs serve as a valuable savings tool specifically designed for individuals enrolled in high-deductible health plans (HDHPs). Their popularity among Americans largely stems from the unique triple tax advantage they offer, which is unparalleled compared to other savings instruments.
Funding for HSAs can occur through pre-tax payroll deductions or tax-deductible contributions, allowing account holders to grow their funds tax-free. Furthermore, qualified withdrawals from HSAs are not subject to taxation. This exceptional combination of tax benefits can make HSAs even more advantageous than 401(k) retirement accounts, where distributions are typically taxed as income. However, it’s worth noting that the contribution limit for HSAs is considerably lower, set at $4,300 annually for individuals.
Maximize Your Savings: The Importance of Investing HSA Funds
According to a recent report by the Employee Benefit Research Institute (EBRI), fewer than one in six HSA account holders are taking the initiative to invest their funds. This statistic is concerning given that the EBRI analyzed a comprehensive database comprising over 14 million accounts.
What accounts for this low investment rate? One contributing factor is that many employers do not provide HSA investing options. However, this is not the sole issue, as more than 64% of employers surveyed in a 2024 report by the Plan Sponsor Council of America indicated that they do offer HSA investment features.
The EBRI report emphasizes that the ability to invest assets within an HSA is “one of the largest advantages HSAs offer.” Alarmingly, the report revealed that in 2023, only 15% of account holders ventured beyond cash investments. This suggests a significant number of individuals may not be aware of their investment options. Typically, contributions can be allocated into mutual funds, brokerage accounts, or certificates of deposit.
Moreover, some individuals may be aware of their investment choices but feel apprehensive about exposing their medical savings to the fluctuations of the market. If anticipating imminent health expenses, maintaining HSA funds in cash may seem like a prudent strategy.
Nonetheless, it’s crucial to consider that investing some of your HSA funds can still be beneficial. If account holders maintain a sufficient balance in liquid assets to manage unexpected healthcare costs, they may enhance their long-term financial position by investing a portion of their HSA funds, as suggested by the report.
Strategic Approaches to Optimize HSA Savings
Even though the term “health savings account” suggests a primary focus on using the funds for medical expenses, the EBRI report highlights that this may not always be the most advantageous approach. Data indicates that many account holders are withdrawing money annually to cover medical costs, which could be counterproductive. In fact, many of these individuals would benefit more from opting to pay out-of-pocket and allowing their HSA funds to grow tax-free.
This strategy may initially appear counterintuitive, which underscores the need for greater education on optimal HSA utilization. The EBRI report points out that many individuals may not realize that once they reach age 65, they can withdraw funds for non-medical purposes without incurring the 20% penalty. At this stage, withdrawals are simply taxed as ordinary income. Additionally, unlike flexible spending accounts (FSAs), there is no deadline for utilizing HSA dollars, providing more flexibility.
It’s also advantageous that older account holders are not mandated by the IRS to take minimum distributions, allowing them complete discretion over their HSA funds. However, it is essential to remember that to avoid penalties before reaching age 65, funds must be used solely for qualifying medical or dental expenses, such as deductibles, copays, over-the-counter medications, and menstrual products.
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