Health care costs are rapidly increasing and could put a dent in your wealth-planning goals during retirement. What if you could prepare for future health care costs while building wealth at the same time? The health savings account makes this possible!
What is a health savings account?
If you aren’t familiar with the Health Savings Account, speak to your trusted financial coach/advisor about your options and how this could fit into your wealth plan.
An HSA is a tax-friendly health savings account used to pay for current or future health care expenses that you may incur during retirement. You can think of it as a personal savings account for medical expenses but with bonus benefits. You just have to use the money for qualified medical expenses in order to maximize your perks and avoid taxes.
Established in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act, the HSA has a reputation for being the most tax-beneficial account around town for people who have good health and an adequate savings rate.
The money you contribute to an HSA is not taxed when it goes in, not taxed as it grows, and not taxed when it’s withdrawn for qualified medical expenses. You’re getting triple tax savings!
What’s the catch? You need an HSA-eligible, high-deductible healthcare plan. These are plans that allow you to pay lower monthly premiums but require you to pay a greater amount of your initial health care costs before your insurance kicks in. If you currently have health concerns and have high medical bills, an HSA might not be an ideal account for you.The Freelancers’ Guide to Health Insurance
You cannot be covered by another health plan, claimed as a dependent on someone else’s tax return, or enrolled in Medicare if you want to get access to an HSA. There are also annual contribution limits that you must be aware of when opening your account.
Do your research and talk to your team of advisors about all the pros and cons associated with an HSA account. If you’re seeking to build wealth in your HSA, here are some things you should know about getting started in the right direction.
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1. Tax-Deductible Contributions
Do you want to pay fewer taxes this year? Contribute to your HSA. The money that you put into your HSA is tax-deductible and allows you to reduce the amount you pay in federal income taxes. You can keep more of your money and use it towards your wealth-building goals.
However, there are limits on how much money you can save in your HSA account every year. For 2022, you can contribute up to $3,550 (individuals), $7,100 (family coverage), and an additional $1,000 “catch-up” contribution if you’re 55 or older.
2. Tax-Deferred Earnings
As long as you have money in your health savings account, you can invest it. When your money can work for you, wealth-building is in progress. You can grow the money in your health savings account by investing in stocks, bonds, mutual funds, ETFs, and other assets. Check with HSA administrators to learn more about your investment options. The money that you accumulate year to year has the opportunity to grow tax-deferred.
3. Tax-Free Withdrawals
If you’re looking for tax-free money during retirement, having an HSA is a great way to meet this goal. Money in your HSA can be withdrawn tax-free as long as you use it for qualified medical expenses.
The key to building wealth in your HSA account is to have as much money in your account as possible that is invested and growing tax-free.
Some people choose to pay for their medical expenses out of pocket and receive reimbursement from their health savings account during that year. But you are not required to reimburse yourself for medical expenses in the year that you had those medical expenses. Knowing this allows you to be strategic about building wealth in your HSA.
You can withdraw funds from your HSA at any time to pay for qualified medical expenses so the trick is to delay your withdrawal of funds. Pay for your expenses out of pocket now and get reimbursed later for it so you can let the money in your health savings account grow.
For example, if you keep great records, you’ll be able to receive an HSA reimbursement 20 years later for qualified medical expenses that you incurred today. That means you’ll have the money in your account growing for a longer period of time!
Charlene Rhinehart is an award-winning speaker, consultant, and coach who uses digital technologies to share inspiring stories with the world. She helps others live their best life as a Financial Coach at Wealthy Women Daily, Founder of the Career Goddess Academy, and Travel & Lifestyle Writer at BlackCoupleTravels.com. Charlene recently published her first book, “Dividends Are a Queen’s Best Friend” on Amazon.
