When it comes to investing your money, health savings accounts offer some of the best tax breaks around.
Also known as HSAs, these options are tied to high-deductible health plans.
They enable you to put away pre-tax money for qualified health expenses. The investments in those accounts grow tax-free. And when you take the money out, generally those funds are not taxed.
“I always point to the virtue of the HSA from a tax standpoint,” said Christine Benz, director of personal finance at research firm Morningstar. “If you stack it up compared to a 401(k) or an IRA, it’s going to come out ahead.”
To get the most out of your HSA, it helps to save and use the money strategically. Taking advantage of these tips can help.
Think of your HSA as a retirement account
“The best use for an HSA is the healthy, wealthy person who leaves their HSA untouched until retirement,” Benz said. “They’re the ones who will benefit the most tax-wise.”
The key to this strategy is having the funds to do it, according to Roger Ma, founder and financial planner at lifelaidout in New York.
Savers who use this strategy should aim to max out their contributions for the year. In 2018, that amounts to $3,450 for individuals and $6,900 for families.
You should also be able to pay out-of-pocket for health-care expenses rather than dipping into the HSA funds.
“If you need to fund a health savings account and use it in the same year, it’s really just functioning as a flexible spending account,” which come with annual use-it-or-lose-it provisions, Ma said.
You also want to be sure that investing fully in an HSA won’t deter you from other long-term goals, such as socking money away for a down payment on a house or maximizing contributions to other retirement accounts, Ma said.
Leaving money in an HSA long-term will enable you to use those funds to cover health-care expenses decades down the road. Plus, you can withdraw funds from that account starting at age 65 for non-health expenses, Ma said, though those withdrawals will be taxed at your marginal tax bracket.
Be on the lookout for better fund options
Some health savings accounts have limited investment options.
But the good news is you can shop around for HSAs with better investments.
Moving funds from one HSA to another is a “great strategy” for savers who are captive in a work-provided plan that isn’t ideal, Morningstar’s Benz said.
From a tax standpoint, it makes sense to first divert the funds to your employer-provided plan rather than moving the money to a separate HSA and reconciling the difference when you file your taxes, Benz said.
The Internal Revenue Service has different rules depending on whether these funds move through a rollover or a transfer.
A rollover must be done within 60 days from when the money is received. You can only do one rollover in a one-year time span.
If you do a direct trustee-to-trustee transfer, on the other hand, there is no limit on the number of those transactions.
Consider a one-time IRA-to-HSA transfer
The IRS will allow you to transfer funds from an individual retirement account to a health savings account once in your lifetime.
This strategy only makes sense in certain situations, according to Benz.
For the most part, it is better to fund your HSA with new funds, rather than transferring retirement assets.
The exception to that rule is if you have large, unexpected medical expenses come up and do not have the funds to cover it, Benz said.
Transferring funds to from an IRA to an HSA will be a better strategy — provided you have the funds to do so — rather than putting the bill on a credit card or using funding options through your doctor.
“This is going to be a better way to go from an interest and tax efficiency perspective,” Benz said.
“On the other hand, it’s never ideal to raid your retirement assets for expenses other than retirement,” she added. “If you have some extremely costly health care event, this is a sensible thing to think about.”
Be careful to follow the rules if you use this strategy.
You must be covered by a high-deductible health plan to make such a transfer. The money also needs to move directly from trustee to trustee, rather than a check made directly to you.
Keep the funds for a rainy day
Hold on to receipts for health and medical expenses you pay out-of-pocket.
Years later, you can still use your HSA for reimbursement for those costs.
“You can pull it on a tax-free basis as long as you have receipts,” Benz said.
That can help curb the effect of other unexpected bills that crop up, as long as you have the receipts to prove you spent that money on qualified medical expenses, Benz said.
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