Unlock Your HSA Potential: 9 Expert Tips from Finance Guru Tae Kim!
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In a recent YouTube video, personal finance guru Tae Kim, known for his insights as the Financial Tortoise, equates a Health Savings Account (HSA) to the quintessential retirement account. This triple-tax-advantaged account pairs beautifully with a high-deductible health plan (HDHP), allowing you to use contributions for qualified medical expenses both now and as you enjoy your golden years.
Want to reap the maximum benefits from your HSA? Kim has laid out several savvy strategies, emphasizing that even if you don’t currently have one, it might be time to consider your options if you qualify.
Step 1: Enroll in an HDHP
To unlock the potential of an HSA, you need to enroll in a qualified HDHP. These plans typically come with high deductibles but lower premiums. Kim points out that the real asset of an HDHP lies in its compatibility with a health savings account.
Keep in mind that eligibility for an HSA extends beyond just having an HDHP; you must not be enrolled in Medicare or have other health coverage. Be sure to crunch the numbers to see if the switch to an HDHP pays off for you.
Step 2: Open Your HSA
Your employer might offer an HSA, or you can explore options through HSA providers or select financial institutions. Often, your health insurer will also provide recommendations.
When choosing a provider, carefully weigh fees and investment opportunities. The goal is to select one that offers access to low-cost, broad market index funds.
Step 3: Max Out Contributions
One of the standout perks of an HSA is its tax advantages. Contributions can be deducted from your taxable income, reducing your overall tax burden. Plus, contributions are exempt from FICA taxes—an often-overlooked benefit that compounds significantly for those with substantial incomes. In 2024, individuals can contribute up to $4,150, while families can contribute up to $8,300. If you’re 55 or older, you can add an additional $1,000!
Step 4: Claim Your Employer’s HSA Contribution
Many employers contribute to their employees’ HSAs to lower their health plan costs, often matching contributions similar to a 401(k) setup. Don’t miss out on this opportunity to boost your balance with what Kim calls “free money.”
Step 5: Maximize Tax Savings
An HSA provides a triple tax advantage: your contributions are tax-deductible, your account grows tax-free, and withdrawals for qualified medical expenses are also tax-free. Kim suggests leveraging these funds for a Roth IRA or a taxable brokerage account to maximize savings if you’ve already hit the limits on other accounts.
Step 6: Delay Immediate Withdrawals for Medical Expenses
While it’s tempting to withdraw from your HSA right away for qualified medical expenses, Kim recommends paying out-of-pocket first. This strategy allows your HSA to grow, and you can reimburse yourself later, even years down the road. This way, you can benefit from compounding growth!
Step 7: Invest Your HSA Funds
Letting your HSA funds languish in a savings account is not ideal—doing so risks inflation eating away at your savings. Treat your HSA as a long-term investment vehicle; consider putting your funds into low-cost, broad-market index funds. This tactic is how some savvy individuals build substantial savings within their HSAs.
Step 8: Keep Detailed Records
Unlike traditional retirement accounts, HSAs allow you to access funds anytime, assuming you have receipts for eligible expenses. Maintain organized records of all medical expenses and receipts. By keeping meticulous records, you’re prepared for potential IRS audits and can ensure you avoid any tax penalties.
Step 9: Utilize Your HSA After Age 65
Once you hit 65, your HSA funds can be used for anything. Withdrawals for non-medical reasons will be taxed as regular income, but if you’re using it for qualified medical expenses, you’re still in the tax-free zone. Kim emphasizes that even if you’ve spent your HSA on non-medical expenses, you can still benefit from its tax advantages.
