(This article previously appeared on YoungAdultMoney.com where it was written for people in their 20s and 30s. If you’re the parent of one, pass this piece along.)
If your health insurance has a Health Savings Account — otherwise known as an HSA —count yourself lucky. There are many reasons to contribute to an HSA, including tax benefits and the fact that it can double as a retirement account.
I contribute the maximum allowable amount to my HSA each year and have no plans of stopping in the future.
I was discussing the benefits of an HSA with a friend recently and he’s gone from contributing nothing to having regular deductions from his paycheck. Why? In large part because, in our discussion, we talked about the many reasons to contribute to an HSA, which I’m about to share with you:
1. It lowers your taxable income
Every dollar you put into your HSA is considered pre-tax. This is a huge advantage and this fact alone makes contributing to an HSA attractive. The maximum allowed contribution for 2015 is $3,350 for an individual and $6,650 for a family; for 2016, the maximum will remain $3,350 for an individual but it will rise to $6,750 for a family. This is net of your personal contributions and your employer contributions.
By contributing regularly to a Health Savings Account, you create a medical emergency fund where the money is available if you ever need it.
2. You might get an employer match
Some employers will match your HSA contributions dollar-for-dollar, up to a certain amount. My employer matches the first $500 I contribute. My wife is on my health insurance plan so we actually get $1,000 matched each year. If your employer matches contributions and you aren’t contributing, you are missing out on “free” money.
3. You can invest the balance
Are you skeptical of having money sitting in a bank account when it could be exposed to the stock market? Think again: You can typically invest the money you have sitting in your HSA. This allows your savings to work for you.
4. You can use it as a secondary retirement account
Pre-tax dollars, an ability to invest in the market…this all sounds familiar. That’s right, you can treat your HSA as if it’s a retirement account. After age 65, you can withdraw funds from an HSA and the withdrawals are treated as regular taxable income. This is, in effect, the same way regular IRA withdrawals are treated.
5. You can keep it when you switch employers
If you have health insurance through your employer, you will not lose your HSA when you switch to a different employer. You will still have access to your HSA and you will be able to continue to use it the same as you have in the past.
6. There’s no “use it or lose it” rule
Many people have flexible spending accounts (FSA) through their employers. These accounts give you a certain amount of money to use to pay qualified medical expenses within a given year. The drawback of an FSA is that it has a “use it or lose it” policy: if you don’t use the money by the end of the year, it’s gone. HSAs are different because you never lose the money by not using them. Cash in an HSA will continue to roll over year after year.
7. You can use it to create a medical emergency fund
Many health insurance plans these days are high-deductible plans. While this is not necessarily a bad thing, it can leave individuals with very large medical bills. By contributing regularly to your Health Savings Account, though, you create a medical emergency fund where the money is available if you ever need it.
Medical issues can happen unexpectedly and there are countless medical conditions that are not preventable. Don’t get caught with big medical bills and no savings; start contributing to an HSA now so the money will be there when you need it.
8. You end up paying no taxes on qualified medical expenses
Since the money you put into your HSA is pre-tax and you don’t have to pay taxes, penalties or fees when you use it for qualified health expenses, you are essentially paying for medical expenses with tax-free dollars. When I first found this out, I thought “you’d have to be crazy to pay with after-tax dollars.” Crazy, or perhaps simply uninformed.
Don’t pay for medical expenses with after-tax dollars when you can pay with pre-tax dollars.
For a list of qualified medical expenses check here. You may be surprised to find out that dental and vision expenses, among others, are qualified.
As you can see, there are many compelling reasons to contribute to an HSA. Like regular contributions to a retirement account, I think it makes a lot of sense to also regularly contribute to an HSA. Worst-case scenario: you don’t use it and the HSA ends up being a second retirement fund.
Next Avenue Editors Also Recommend:
- Is Obamacare Becoming the Unaffordable Care Act?
- How to Ease the Bite of High-Deductible Health Plans
- Retirement Health Costs: Planning for the Wild Card
- Americans’ Disconnect Over Health Costs
Next Avenue brings you stories that are inspiring and change lives. We know that because we hear it from our readers every single day. One reader says,
"Every time I read a post, I feel like I'm able to take a single, clear lesson away from it, which is why I think it's so great."
Your generous donation will help us continue to bring you the information you care about. What story will you help make possible?