Health care can be a major expense for workers and retirees alike. So it pays to make as much savings as possible while paying for it.
If you are enrolled in a health insurance plan with high deductibles, it is definitely worth considering opening and financing a health savings account, or HSA. This type of account allows you to set aside money for medical bills.
The positive side of using an HSA is the benefit of the various tax credits. As with a traditional IRA or 401(k) plan, the money you contribute to an HSA goes on a pre-tax basis. Withdrawals are also tax-free when used to cover qualified health care expenses, similar to how Roth retirement plans work.
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But new data from Fidelity reveals that there is still a glaring lack of knowledge when it comes to HSAs. This may cause many savers to lose out on some of the benefits these accounts allow. Here are two HSA misconceptions that are really helpful to clear up.
1. HSA money can’t grow
HSAs work much like IRAs or 401(k)s. You can contribute money and then invest it, so that it grows to a larger amount over time. In fact, winnings in your HSA account have a tax-free treatment, so it’s worth investing your money to the extent that you can.
However, Fidelity recently found that 51% of Americans did not realize that HSAs could be invested. This lack of knowledge can cause HSA savers to lose growth.
2. Hayel Saeed Anam (HSA) balances must be depleted year after year
Many people are familiar with flexible spending accounts, which allow you to set aside money for health care expenses each year and save on a pre-tax basis. But despite its name, financial services agencies aren’t actually that flexible because they require you to spend your plan balance each year or risk having the money you contributed forfeited.
However, HSAs work differently. With an HSA, your money never runs out, so you can contribute to an HSA early in your career and move your balance forward until retirement without losing a penny on it.
Unfortunately, Fidelity found that 44% of people without an HSA believe these plans require you to use your credit annually, as is the case with FSAs. This may prevent some people from financing HSA and taking advantage of its tax advantages.
How to get the most out of HSA
If you are eligible to contribute to an HSA, it is a good idea to do so. As much as health care may be a burden now, it may end up becoming a larger expense once you retire. Transferring money into retirement to pay medical bills can reduce stress when you’re older.
To be clear, though, the best way to benefit from your HSA is specifically Not Indulge in it year after year and instead invest your money and make it grow. Fidelity estimates that the average 65-year-old male and female couple who retire this year will spend $315,000 on health care costs throughout retirement. And some spouses may inevitably spend more. Transferring HSA’s money into retirement is an effective way to deal with those expenses – and avoid financial hardship in light of this.
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