When to Spend Your HSA
Best Times to Use Your HSA Funds
Healthcare expenses can be overwhelming, but there are ways to save on insurance and out-of-pocket costs. One option is to utilize a healthcare savings account to help cover medical and dental expenses. At Cedar Grove Dental Group, patients with healthcare savings accounts can use them for dental services in Cedar Grove, NJ and the surrounding area. Our team will assist in determining the best financial plan for treatment. Contact us at (973) 857-0567 for more information or to book an appointment.
A Retirement Investment Tool
Healthcare.gov explains that an HSA is a tax-free account used to help cover medical costs. To contribute to an HSA, individuals must have a high-deductible insurance plan and there is a yearly limit on contributions. Unlike flexible savings accounts, funds in an HSA roll over each year, allowing the balance to grow. In retirement, HSA funds can be used for any purpose, not just medical expenses, making it a valuable investment tool due to its tax advantages compared to other retirement accounts.
“An HSA is a great investment tool for retirement since other types of retirement accounts incur taxes.”
Tax Benefits of an HSA
Opening an HSA offers the significant advantage of reducing tax liability. By utilizing an HSA, individuals can retain more of their earnings each year and minimize the amount they owe to the IRS. Some benefits of opening and contributing to an HSA are:
- Contributions: Money contributed to an HSA is tax-free. Some individuals set up their accounts for automatic monthly contributions from their pay. These contributions are withdrawn before taxes, reducing taxable income and lowering yearly tax liability.
- Earnings: An HSA can earn interest, and these earnings are also tax-free. The larger the HSA balance, the more tax-free earnings it can generate.
- Withdrawals: Withdrawals from an HSA for qualifying medical expenses are not taxed. There is no need to spend the HSA funds by the end of the year, allowing for flexible timing of medical expenses.
“Lowering tax liability with an HSA allows people to keep more of their paycheck each year and give less to the IRS.”
Strategies for Investing and Spending
To make the most of HSA rules, it is crucial to spend and invest wisely. It is beneficial to save some HSA funds for retirement expenses, so it is advised not to use up all contributions. Instead, consider using a portion for routine medical or dental expenses and let the rest grow with additional contributions.
A variety of dental expenses are eligible for HSA spending, which can help cover costs not covered by insurance. To increase the HSA balance, consider investing a portion in mutual funds, bonds, or stocks.
“To grow an HSA balance, it is a good idea to invest a portion of it in mutual funds, bonds, or stocks.”
When switching jobs, transferring an HSA
When switching jobs, transferring your HSA to your new employer may require following specific rules based on their health insurance plan. If the new employer does not offer a high-deductible health plan, you may no longer be able to contribute to your HSA.
In some cases, you may need to roll over funds from one HSA account to another when transitioning to a new employer-sponsored HSA. Alternatively, you can choose to keep your old account open for withdrawals while starting a new HSA with your new employer. Although you won't be able to contribute to the old HSA, you can still use it for withdrawals.
“The rules of transferring an HSA are dependent on the employer-sponsored health insurance plan.”
When is the best time to open an HSA?
When it comes to opening a new HSA, there are various timing strategies to consider. If someone meets the qualifications, they can open an HSA account at any point. It is advisable for individuals to open an HSA early in their careers when they are young, healthy, and have minimal medical expenses.
Young individuals can also take advantage of a high-deductible plan and maximize their potential long-term retirement savings. Those looking to open an HSA should create an investment and savings plan, and then explore the various options available for setting up an HSA.
