How Your HSA Can Help

It’s no secret that healthcare costs are on the rise. In fact, a recent study by Fidelity showed that the average couple will spend over $275,000 on healthcare costs in retirement. We discuss how to use your HSA with Katie Burke, founder of Method Financial Planning in Philadelphia.

Light: Healthcare costs are a huge expense, and it’s one that can be difficult to budget for. What is the role of a health savings account, or HSA, in budgeting?

Burke: Like with most pieces of your financial puzzle, a bit of careful and thoughtful planning can go a long way. And when it comes to healthcare expenses, your HSA can be a big part of that plan.

Light: Can you explain how an HSA works and how it is different from a flexible savings account, or FSA?

Burke: An HSA is a special savings account that allows you to set aside money for healthcare expenses, tax-free. That means that any money you contribute to your HSA can be used to pay for qualifying healthcare costs, and you won’t have to pay any taxes on it. Additionally, the money in your HSA can grow tax-deferred, similar to a traditional individual retirement account, or IRA. And, unlike an FSA, the money in your HSA stays with you from year to year—if you don’t use it all in one year, it stays there and continues to grow. That makes an HSA a great tool for long-term savings.

Light: So, how can you use it specifically to help achieve your financial goals?

Burke: One of the best ways to use your HSA is to save for retirement. Because the money in your HSA can grow tax-deferred, it can be a great way to supplement your other retirement savings. For example, let’s say you contribute $500 to your HSA each year and that it grows at a rate of 5%. After 20 years, you would have nearly $14,000 in your account. And because the money is tax-free, you could use it to pay for qualified healthcare expenses in retirement. This includes things like Medicare premiums, out-of-pocket costs, and long-term care insurance premiums.

Light: What about your current healthcare expenses?

Burke: Yes, that’s another great way to use your HSA. This can be a great way to save money on taxes, as you won’t have to pay taxes on the money you withdraw from your HSA to pay for qualified healthcare expenses. Additionally, you can let the money in your account continue to grow tax-deferred. This is a great way to get a double dip on your savings. You save on taxes now, and you get the benefit of tax-deferred growth.

Light: What other factors should you know about your HSA?

Burke: There are a few things to keep in mind when using your HSA to pay for current healthcare expenses, though. First, you’ll need to make sure that the expenses you’re paying for are qualified medical expenses. This includes things like doctor’s visits, prescription drugs and dental care. Additionally, you’ll need to keep track of your expenses, as you’ll need to submit documentation to your HSA provider when you request a withdrawal. And finally, remember that you can only withdraw as much money as you have in your account. So be sure to plan ahead.

Light: Any final thoughts?

Burke: The bottom line is this: Your HSA can be a powerful tool to help you achieve financial success. Whether you’re looking to save for retirement or pay for current healthcare costs, your HSA can help you reach your full potential. So be sure to take advantage of it.