Healthcare can be a major expense for workers and retirees alike. So it pays to eke out as much savings as possible in the course of paying for it.
If you’re enrolled in a high-deductible health insurance plan, it definitely pays to look at opening and funding a health savings account, or HSA. This type of account allows you to set money aside for medical bills.
The upside of using an HSA is getting to benefit from different tax breaks. As is the case with a traditional IRA or 401(k) plan, the money you contribute to an HSA goes in on a pre-tax basis. Withdrawals are also tax-free when used for qualified healthcare expenses, similar to how Roth retirement plans work.
But new data from Fidelity reveals that there’s still a glaring lack of knowledge when it comes to HSAs. And that could cause a lot of savers to lose out on some of the benefits these accounts allow for. Here are two HSA-specific misconceptions it really pays to clear up.
1. HSA funds can’t grow
HSAs work a lot like an IRAs or 401(k)s. You can contribute money and then invest it, so it grows into a larger sum in time. In fact, gains in your HSA enjoy tax-free treatment, so it pays to invest your money to the extent that you can.
Yet recently, Fidelity found that 51% of Americans didn’t realize HSAs could be invested. And that lack of knowledge could cause HSA savers to miss out on growth.
2. HSA balances must be depleted year after year
Many people are familiar with flexible spending accounts, or FSAs, which let you allocate money to healthcare expenses every year and save on a pre-tax basis. But despite their name, FSAs actually aren’t all that flexible because they require you to spend down your plan balance every year or risk forfeiting the funds you’ve contributed.
HSAs work differently, though. With an HSA, your money never expires, so you can contribute to an HSA early on in your career and carry your balance forward all the way into retirement without losing a penny of it.
Unfortunately, Fidelity found that 44% of people who don’t have an HSA think these plans require you to use up your balance annually, like with FSAs. And that may be keeping some people from funding an HSA and benefiting from its tax-advantaged features.
How to make the most of your HSA
If you’re eligible to contribute to an HSA, it pays to do so. As much as healthcare may be a burden now, it could end up being an even more substantial expense once you retire. Carrying funds into retirement for medical bills could result in less stress when you’re older.
To be clear, though, the best way to benefit from your HSA is to specifically not dip into it year after year, and instead, invest your money and let it grow. Fidelity estimates that the average 65-year-old male-female couple retiring this year will spend $315,000 on healthcare costs throughout retirement. And some couples might inevitably spend more. Carrying HSA funds into retirement is an effective way to deal with that expense — and avoid financial hardships in light of it.
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