Your 3-part self-questionnaire for HSA management

Choosing a high-deductible health plan (HDHP) coupled with an HSA is an attractive option for younger people. Because HSAs aren't subject to any "use it or lose it" rules, there are a number of ways you can turn an HSA into an important piece of your long-term financial plan. But there are also questions you should ask yourself first, to make sure you're really leveraging these tax-free funds the best way possible.

Before we start, please remember that we are not tax or finance professionals. Suggestions and information provided are based on the author's opinions and experience, as well as commonly accepted behaviors conducted by HSA holders. It should not be considered legal or tax advice. Please consult a tax or finance professional before making any account decisions.

That said, here are three of the biggest questions we think you should ask:

Are you making the most of your HSA funds?

Keeping HSA contributions in a low-yield deposit account has the advantage of also keeping that money ready to be withdrawn for medical expenses. But, if you're looking at your HSA as a part of a bigger retirement plan, at least some portion of that account should probably be invested.

The actual mix between cash, bonds and stocks is dependent on individual circumstances and willingness to assume investment risk. But the key is to remember your HSA money isn't limited to remaining in a low-yield deposit account.

Not everyone got the message – according to the 2022 Mid-Year Devenir HSA Research Report, only 7% of HSAs have at least some dollars invested.

Are you contributing as much as you could?

If you're using your HSA as part of retirement planning, you may want to consider contributing the maximum amount each year. For 2024 that's $4,150 for those participating in the health plan as individuals and $8,300 for those participating as two-person or family. The reasoning is those contributions are completely tax-free as long as they're only spent on qualifying expenses or held until 65 (income taxes apply).

As a savings vehicle, HSAs have what's commonly called the "triple tax advantage" over even more traditional retirement accounts like 401(k)s. This means HSA contributions are tax-deductible, the interest earned is tax-free, and qualified withdrawals are tax-free, as well.

The value in using an HSA for retirement is your money receives all the benefits of the triple tax advantage and can be invested in stocks and bonds just like other retirement vehicles, but it's also there for tax-free withdrawal in case of medical expenditures that impact retirement planning.

Are you sure you want to withdraw?

Sometimes, people need a quick source of money -- it happens to a lot of people. But before you go tapping into your HSA for funds, see if you've exhausted other possibilities, even if the money is needed for medical expenses.

Instead, consider HSA money more as long-term savings. Think of your funds as money available for unexpected medical expenses down the line -- expenses that won't get hit with a significant penalty unlike an early withdrawal from a 401(k).

The value in this approach happens when you reach your 65th birthday. Once an HSA holder turns 65, that money can be withdrawn for any reason completely penalty-free and only income taxes will apply. Simply having funds in an HSA once you are 65 turns that money into pure retirement income.

It's your money, and no one but you can make the right determination on how to best use it. But to maximize your account, you might want to be patient before making that withdrawal.

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