The Health Savings Account is the relatively new kid on the block in the healthcare world (check out my intro post to the HSA here). The HSA has the distinct advantage of staying with you at the end of every year rather than expiring on December 31 like Flexible Spending Accounts. Depending on which bank you open your HSA with, that money can be invested or gain a small amount of interest. If you’re eligible for it, it is a nice account to have because contributions, earnings, and qualified distributions are all tax free.
There is one condition of the HSA that actually gives it a while new dimension. It can act as an IRA. My eyes were opened to this idea from a post by the Mad Fientist. It took me a few days to kind of wrap my head around it but ever since I did, I’m all in. And it’s all because of one rule regarding HSA’s: any distributions made from the account after the age of 65 can be used for ANYTHING. Meaning that after you turn 65, you can use the money for healthcare expenses, paying the mortgage, going on a vacation or just letting it sit in the account and grow. The one caveat is that if you withdraw HSA money after 65 for anything other than healthcare expenses, you will have to pay taxes on it. This makes it similar to a traditional IRA.
The key to making this happen is that you don’t have to DIRECTLY pay for healthcare expenses because the funds don’t expire. Let me explain. With an FSA, the money expires at the end of the year so you better use that money on any and all healthcare expenses. Or scramble to get glasses in December like I did because I had too much money left over. You either use the debit card they give you or pay for it yourself and make sure to submit the receipt by the end of the year. With an HSA, you can just pay for a $100 doctor’s visit out of your own pocket (ideally with a rewards credit card), hang on to the receipt and know that you have two choices. The first choice is to now move $100 from your HSA to your checking account to cover the $100 charge you made. This is fine if you know you won’t have enough money in your checking or savings to cover the bill. This is also similar to what you would do with an FSA.
The second choice, and the better one, is to not touch your HSA money and simply file the receipt away for future use. This will allow that $100 to grow in the account and still give you the ability to withdraw that $100 at some time in the future if you really need it. Or, ideally, just let it sit in the account until you’re 65 and withdraw it without penalty or taxes.
There are certainly some things to keep in mind when using the HSA as a modified IRA. If you have a genuine healthcare emergency that you will definitely not be able to cover out of pocket, use the HSA money. That’s what it’s there for. Hopefully the emergency will happen after you have had a few years to build up some money in the account (the 2014 IRS limit for HSA contributions for a family is $6,550). So saving the max amount even after a few years will give you a nice cushion in case of a high hospital bill. So if you haven’t opened an HSA or are not contributing the max amount, find a way to do so.
For its intended use, the HSA is a great account as it allows you to set aside money tax free, lets the money grow in the account tax free and lets you withdraw it tax free for qualified healthcare expenses, which we all need to spend money on at some point. No other account allows you to do this. But if you can keep your healthcare expenses low and cover them out of pocket, this money can grow and grow until 65 and if you need it before then, it will certainly be there for you. Just be sure to hang on to your receipts.