Health savings accounts (HSAs) hold significant potential for individuals seeking to bolster their savings strategy, particularly for those who manage to cover healthcare expenses with other resources, allowing their HSA assets to accumulate and grow over time.
Investors who cover healthcare costs out-of-pocket can capitalize on HSA account growth, benefiting from the effects of compounding. Additionally, the tax advantages associated with HSAs become more impactful when spread over an extended period.
Before deciding to use an HSA for long-term investing, it is essential for investors to conduct thorough research and analysis.
Maximize HSA Growth
Determining when you plan to use the money is a critical aspect of managing your HSA investments. HSAs boast triple tax-advantaged status, and their investment power amplifies as time progresses. For example, if an investor contributes $6,000 to an HSA with a 5% annual return, they could amass nearly $10,000 by the end of a decade without incurring any taxes along the way.
Comparatively, an investor who contributes to a taxable brokerage account with post-tax dollars would direct around $4,500 into the account, after a 25% income tax deduction on the initial $6,000. Under the same 5% annual return, the account’s value would reach approximately $7,412 after 10 years. Considering a 15% capital gains tax, the net gain would be less than $7,000.
Strategizing HSA Asset Allocation
Aligning HSA assets with retirement investments can be prudent, positioning them more aggressively when retirement is distant. As retirement nears, planning for liquidation based on upcoming healthcare costs is sensible. Analyzing qualified tax-free withdrawal expenses can aid in this planning.
Premiums for Medicare supplemental policies don’t qualify for tax-free withdrawals, but other expenses such as Medicare premiums (Parts B, C, D), certain long-term-care insurance premiums (subject to IRS conditions), and out-of-pocket drug costs do qualify.
With an estimation of yearly healthcare expenditures, retirees can better allocate resources from their HSAs.
Placing HSA in Retirement Withdrawals Order
Retirees must integrate their HSAs into their overall distribution strategy. Typically, HSAs should be accessed after consuming taxable account funds and before tapping into traditional IRAs and 401(k)s. HSAs offer tax-free growth and tax-free healthcare withdrawals, making it advantageous to retain these accounts’ benefits as long as possible.
The choice between withdrawing from HSAs or Roth IRAs hinges on the fact that both have tax-free withdrawals, though HSAs lack the Required Minimum Distributions (RMDs) associated with traditional accounts. However, HSAs do not offer the same inheritance tax benefits as Roth IRAs.
Beneficiaries and HSA Considerations
Assigning beneficiaries to HSAs deserves careful thought. While naming a spouse can be strategic, the surviving spouse may consider quickening the use of the HSA funds or appointing a charity as a beneficiary. Unlike a human non-spouse inheritor, a charity would not incur taxes on the inherited amount.
Ultimately, understanding and strategically managing HSAs can offer significant financial advantages, especially when aligned with well-thought-out investment and retirement strategies.
