When my daughter came home from a party in June with a horribly bruised finger, I had a bad feeling about it. I gave it a couple of days, but when it didn’t start to heal, I took her to an orthopedist. And lo and behold, her finger was broken. Not only did that mean several weeks without sports, piano, or other activities for my poor daughter, but it also meant an $850 medical bill for me to contend with.
Now, because my family maxed out our HSA last year at $7,300, we had enough of a balance in that account to cover the $850 orthopedist bill. But I opted not to raid my HSA and instead take the money out of my savings account for one big reason.
When you have money in a flexible spending account (FSA), it pays to tap your balance as soon as you rack up medical expenses. FSAs require you to use up your plan balance every year or otherwise risk forfeiting some of your money.
HSAs work differently. With an HSA, there’s no time limit to using your funds. You can contribute to your account this year and withdraw that money in 2042 should you so choose.
Plus, HSAs allow you to invest money you don’t need to withdraw right away so you can grow your balance into a larger sum. And because investment gains in an HSA are tax free, that’s a tempting offer.
It’s for this reason that I opted not to touch my HSA when a large medical bill landed in my lap. Because I knew I had the money in savings, I figured it made more sense to take a withdrawal from there than to tap my HSA and lose out on the chance to invest that $850 in a tax-free manner.
See, over the past 50 years, the stock market has delivered an average annual return of 10%. Even if the returns I get in my HSA aren’t as high, let’s say I’m able to leave that $850 in my account for 20 years and score a 7% return on it. That still means growing that $850 into about $3,300.
I’m also well aware that healthcare costs tend to be higher in retirement than during people’s working years. So I’d rather have a larger HSA balance then, when medical spending might eat up a lot more of my income.
Plus, one cool thing about HSAs is that they effectively convert to a traditional retirement savings plan once you turn 65. What this means is that you’re not penalized for taking HSA withdrawals for non-medical purposes from that point onward.
So, let’s say you manage to amass a $200,000 HSA balance by age 65, and your health ends up being great during retirement. You’re not at risk of wasting or forfeiting that money because you can withdraw it for things like home repairs, groceries, and entertainment without penalty. All that happens is that non-medical withdrawals are subject to taxes (which is how a traditional IRA works), whereas medical withdrawals are tax free.
The reason my strategy of not touching my HSA for near-term medical bills works is that I have other funds set aside in savings to cover such expenses. If you want the option to leave your HSA untapped and invested as long as possible, then you’ll need to make sure to build an emergency fund that can cover unplanned medical bills.
If you take that step, you might end up with a lot of money in your HSA over time. And that could make for a far less financially stressful retirement.
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you 12x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2023.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
Blog powered by G6
Disclaimer! A guest author has made this post. G6 has not checked the post. its content and attachments and under no circumstances will G6 be held responsible or liable in any way for any claims, damages, losses, expenses, costs or liabilities whatsoever (including, without limitation, any direct or indirect damages for loss of profits, business interruption or loss of information) resulting or arising directly or indirectly from your use of or inability to use this website or any websites linked to it, or from your reliance on the information and material on this website, even if the G6 has been advised of the possibility of such damages in advance.
For any inquiries, please contact [email protected]