Unlocking the Hidden Benefits of Health Savings Accounts (HSAs)

Healthcare costs can sneak up on everyone, but there are smart ways to manage these expenses while saving on taxes.

Image source: Getty Images.

A recent study shows that most people with Health Savings Accounts (HSAs) are not fully utilizing one significant advantage of these accounts.

Are You Missing Out on HSA Benefits?

HSAs come with three important tax benefits:

• Contributions are tax-deductible.
• Withdrawals for qualified medical expenses are tax-free.
• Investment earnings can be withdrawn without tax.

However, many individuals don’t take advantage of the last benefit. In 2023, only 18% of HSA participants were investing their balances, according to the Plan Sponsor Council of America. This reluctance may stem from misunderstandings about how HSAs work compared to flexible spending accounts (FSAs).

FSAs also provide tax breaks, but they must typically be emptied within the year of contribution. If not, you risk losing the unspent funds. Some employers allow a short grace period or small carryover, but the strict rules can make FSAs less flexible.

In contrast, HSAs do not have an expiration date on your funds. Contributions roll over year to year, allowing you to invest and grow your balance. It’s a strategy that can benefit you greatly, especially as you approach retirement. However, if you withdraw money for non-medical expenses before age 65, you’ll face income taxes and a 20% penalty.

Maximize Your HSA for Retirement

Many people utilize their HSA to cover immediate medical expenses, which is perfectly acceptable. However, consider letting your balance grow by investing it instead. This approach could mean greater resources for healthcare costs as you age, when expenses tend to rise.

Once you reach age 65, the tax penalties for non-medical withdrawals cease. At that point, an HSA can function similarly to a traditional retirement account. If you choose to withdraw funds for non-medical reasons, you will owe regular income taxes, similar to how a traditional IRA or 401(k) operates.

It may not be surprising that many people ignore the long-term investment potential of their HSAs. Yet, this oversight can result in missed opportunities for tax-free growth. Ensure you are not among those neglecting this valuable resource.

The $22,924 Social Security Bonus Many Retirees Overlook

If you’re like most Americans, you may not have saved enough for retirement. However, some lesser-known “Social Security secrets” could significantly enhance your retirement income. For instance, one simple strategy might provide as much as $22,924 more each year. Discover how to maximize your Social Security benefits to retire securely and confidently. Click here to learn more about these important strategies.

Explore “Social Security secrets” »

The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.