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HSAs Are No-Brainers For These Two Types of People

HSAs Are No-Brainers For These Two Types of People


While HSAs are valuable tools for everyone, there are two types of people who are especially well-suited for them: millennials and individuals who are nearing retirement. If you’re one of those people (or if you’re an employer with employees in either of those groups), keep reading to see why HSAs could be a perfect fit for you.

HDHPs and HSAs: A Quick Review

HSAs are savings and investment accounts used for tax-free payment or reimbursement of qualified medical expenses. Only individuals under qualified high deductible health plans (HDHPs) are eligible to contribute to their HSAs; HSA funds can either be spent on current healthcare costs or invested for future medical expenses. Once accountholders enroll in Medicare, they aren’t eligible to contribute to their HSAs anymore, but they’re free to use the existing funds in their accounts. After age 65, accountholders can use HSA funds for non-medical expenses with no tax penalty; they just have to pay income taxes on the withdrawn funds.

HSAs For Millennials

Younger people, especially if they’re single or married without children, generally require less medical care than older folks with families. Since HDHPs typically have lower monthly premiums than traditional health plans, they’re a natural fit for millennials who don’t see the doctor much. Those premiums savings often more than cover the infrequent out-of-pocket medical costs millennials will incur each year.

With their unparalleled tax advantages, HSAs give millennials an easy way to save even more on medical expenses. By stashing money away in their HSAs, millennials can create a repository of tax-free funds to use for healthcare costs when they incur them. Also, since HSAs have no use-it-or-lose-it limits like FSAs do, millennials don’t have to guess how much medical care they’ll need that year and risk losing what they don’t spend. And because HSAs are portable, millennials can contribute worry-free, knowing the funds will stay with them when they change jobs. They don’t have to spend down the account when moving to a new job, and even if that new job doesn’t have an HDHP option, millennials can still have access to their existing HSA funds.

In addition, millennials have more time before they retire, giving them a great opportunity to take full advantage of the power of compounding interest in their investments. By paying for their medical costs out of pockets and investing their HSA dollars, millennials can start growing medical eggs to cover their healthcare expenses in retirement. The average couple retiring at 65 in 2018 will have to pay $400,000 in retirement medical costs that aren’t covered by Medicare, according to a Healthview study. That sounds like a daunting task. However, if a 22-year-old put $170 into their HSA each month until they were 65 and invested their funds*, they’d have $400,000 in tax-free dollars for their retirement healthcare expenses.

HSAs For Individuals Nearing Retirement

In addition to millennials, individuals nearing retirement are also prime candidates for HDHPs and HSAs. Although folks nearing retirement probably have higher medical expenses to pay for, they’re also more likely to have the out-of-pocket funds necessary to pay for those pre-deductible costs. Also, if these people are already maxing out their 401(k)s and/or IRAs, having an additional savings vehicle for retirement can be invaluable. Contributing to an HSA will provide them with a dedicated savings stream for future healthcare costs, as well as lower their taxable income. And accountholders over age 55 can take advantage of HSAs’ $1,000 annual catch-up contribution, which increases the amount they can put into their HSAs each year.

If they don’t have HSAs, retirees must pay for healthcare costs from other savings sources, which means they’ll have to pay taxes on those expenses. Having an investment HSA allows retirees to pay for medical expenses tax-free and save their 401(k) and IRA funds for other expenses. And if accountholders need their HSA dollars for non-medical costs, the funds can be withdrawn without any tax penalty after age 65. Before accountholders turn 65, withdrawals for non-medical costs face a 20% tax penalty in addition to income taxes, but after they turn 65, they only have to pay income taxes on those funds. In addition, since HSAs have no required minimum distributions, accountholders don’t have to withdraw funds until they need them, unlike 401(k)s and IRAs.

If you’re a millennial, HSAs give you the ability to turn your less-frequent medical needs into savings. And for individuals nearing retirement, HSAs are a dedicated savings vehicle to ensure a financially secure retirement. Ready to get started?

*This calculation assumes a 6% market return.

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Why Millennials Should Care About HSAs (From A Millennial)

Let’s face it, there are a lot of things competing for our cash these days. Student loans, building up our emergency funds, or, dare I say, a fun trip or dinner out with friends? Trust me, I get it. But for millennials, contributing to a health savings account (HSA) should be high on the list of how we use our dollars.

What are HSAs?

Simply put, HSAs are tax-advantaged savings accounts you can use to pay for or reimburse yourself for medical expenses. The money you put in is tax-deductible or tax-free, your money grows tax-free, and you can withdraw funds tax-free to pay for qualified medical costs. And unlike flexible spending accounts (FSAs), HSAs don’t have any use-it-or-lose-it rules; they roll over each year and stay with you if you switch jobs.

To make HSA contributions, you must also be covered under a consumer-driven health plan (CDHP). CDHPs tend to have higher deductibles (the amount you’re responsible for paying in full) than traditional plans, but they also typically have lower monthly premiums.

If you’re generally healthy and don’t go to the doctor often, a CDHP will actually save you money. Instead of shelling out on monthly premiums for services you don’t use, CDHPs keep monthly premiums low so you’re rewarded for staying healthy. If you’re switching from a traditional plan, a great saving strategy is to put the difference between your previous higher premium and your current one into an HSA. That way, when you do have to go to the doctor or pick up a prescription, you have tax-free money at your disposal.

HSAs’ Long-Term Benefits

In addition to saving you money on current medical expenses, an HSA can also help you prepare for future healthcare costs. If you’re able to pay out-of-pocket for qualified medical expenses, you can invest the money in your HSA just as you would the money in your retirement account. Basically, your HSA becomes a medical 401(k) instead of just another savings account, and you don’t have to pay taxes for qualified healthcare costs.

And with HSAs, you can reimburse yourself any time for qualified medical expenses … in a week, in a year, or thirty years from now. So if you pay for qualified medical expenses out-of-pocket, make sure to save your medical receipts so you can reimburse yourself down the road once your HSA has had time to grow. And the best part is, you can reimburse yourself tax-free, then spend those funds however you like, no questions asked. That’s the secret of shoeboxing.

One of millennials’ greatest advantages (besides our good looks, of course) is that we have lots of time before retirement. Whether you choose to invest your HSA money or not, this matters for you. If you do invest, that means your money has more time to earn interest and grow. Even if you can’t contribute much now, the compounding interest you’ll get over time will grow your funds significantly.

If you can’t pay medical expenses out-of-pocket and pay with HSA funds, time is still on your side. Ideally, you and/or your employer are putting money in your HSA each paycheck. So, if you have an unexpected $800 medical expense but only have $500 in your HSA, you can use up your $500 and pay $300 out-of-pocket. Then, you can reimburse yourself for the $300 once you build up the funds in your HSA.

Having an HSA is one of the best choices we millennials can make now to set ourselves up for a more secure financial future. Our Boomer selves will thank us later.

For more information about health savings accounts, call us at (888) 354-0697. Or, click here to open an account.

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