Here’s how to put one together for use with your health savings account

Health savings accounts can be a powerful way to build wealth and prepare for medical expenses in old age - if used properly.

HSAs carry triple tax breaks. Contributions and investment growth are tax-free, as are withdrawals if used for eligible health care costs.

Even if the withdrawal was not health-related, the account holder would only owe income tax on those funds - in effect converting the HSA into a tax-deductible account similar to a traditional 401 (k) plan or individual retirement account.

“I almost don’t think of them as health savings accounts, but as retirement accounts that are heavily taxed,” said Andy Bexley, a certified financial planner from Chicago at The Planning Center.

According to financial advisors, the ideal way for savers to use HSA is to contribute to the annual maximum, invest money and pay current health expenses out of their own pocket through other savings.

This allows HSA money to grow tax-free. HSA investments are like those in any other retirement account, for example with diversified mutual funds of shares and bonds.

However, most people do not invest their HSA savings. Instead, they use the HSA as a bank account and withdraw cash as needed to pay for current medical expenses.

According to the Employee Benefits Research Institute, only 9% of account holders invested part of their HSA balance in 2020. The rest - 91% - kept their full balance in cash.

But this offers virtually no rapid growth - a shortcoming when retirement health costs are expected to be around $ 300,000 for the average couple who retired in 2021, according to Fidelity Investments.

The IRS lists a wide range of qualified HSA health costs, such as those related to dental care, vision, hearing, long-term care insurance premiums (subject to restrictions), and medications, for example.

Savers who now pay out of their own pocket health expenses can take advantage of another HSA benefit in the coming years: they can withdraw funds from their accounts to recoup (tax-free) those earlier expenses.

As with withdrawing from a Roth 401 (k) or IRA, these HSA benefits can offer retirement income and help someone control their tax account.

Let’s say you’re on the verge of jumping into higher retirement income tax, but you’ve spent $ 10,000 out of pocket over medical bills over the years. You can withdraw that $ 10,000 from your HSA for upfront expenses without increasing your taxable income.

(One important point: Costs incurred before establishing your HSA are not considered qualifying medical expenses.)

“I think [people] they often don’t realize how wide the list of things you can get compensation for is, “Bucksley said, citing infertility treatment as an example.

He recommends that you make a table of unreimbursed medical expenses (so you know how much you can pay yourself later) and keep receipts for proof.

Of course, many people do not have the financial means to use HSA in an ideal way.

Individuals live longer and have had to take on greater individual responsibility for their retirement savings, as companies, for example, have changed pensions for 401 (k) plans.

Limited cash flow can mean you have competitive financial priorities: emergency funds, retirement plans, and health savings, for example. (Individuals and families can contribute up to $ 3,650 and $ 7,300 for HSA this year.) Paying current expenses out of your own pocket may also not be possible, depending on a person’s financial situation.

More from Personal Finance:
Why 2022 was a dangerous time for retirement
You cannot invest money in the HSA when you are on Medicare
The IRS is increasing the contribution limits for the HSA by 2023

Further, only those with high-deductible health plans can save in HSA. In 2021, 28% of workers covered by employer-sponsored health insurance were enrolled in a high-deductible health plan with a savings option such as the HSA, according to the Kaiser Family Foundation. (Enrollment is slightly higher in large companies with more than 200 employees.)

On the warning side, those who have access should try to use them as optimally as possible, financial advisers said.

“HSA is a simple matter for almost anyone who has access,” says Carolin McClanahan, MD and CFP who is the founder and head of financial planning at Life Planning Partners in Jacksonville, Florida.

A plan with a high deduction - and, therefore, the HSA - may not be the best choice for everyone. For example, someone with a chronic illness that leads to frequent visits to the doctor may benefit more financially from a plan with lower annual out-of-pocket costs.

Like any other investment account, it is imperative that you understand your financial and psychological ability to take risks by investing HSA funds, McLanahan said.

This means that you can withstand the ups and downs of the stock market and align your strategy with the investment horizon.

For example, young savers with financial means to pay out of their own pocket for today’s health care costs can afford the risk - perhaps in a cheap, widely diversified stock fund, McLanahan said.

However, savers who do not have the funds to cover their annual deduction or maximum out of pocket with other savings should keep at least this amount in cash or something as conservative as a money market fund before investing the rest, McLanahan said. . (Some HSA providers require account holders to keep a certain amount in cash before investing.)

This is especially the case for savers who are not healthy and who need frequent health care, she added.

Similarly, someone who is closer to retirement age should probably reduce their stock allocations so as not to put money at risk near the age at which they will start using their accounts.