Three Reasons Why You Should be Maxing Out your HSA

A Health Savings Account (HSA) is a tax-advantaged account that provides financial advantages to account holders.

In this article, we’ll define what an HSA is and explore why you should consider contributing as much as possible to your account each year.

What is a health savings account (HSA)?

A health savings account, or HSA,  is a special tax-advantaged account designed to help you pay for qualified healthcare expenses now and in the future. HSAs can function as both a short-term fund for current medical expenses and a long-term investment vehicle for future expenses.

The IRS sets the rules for who can contribute to an HSA, and they adjust the maximum amount that can be contributed each year. For this reason, you should stay up-to-date with the current annual maximums each year.  

If you partner with a professional financial advisor, be sure to include HSAs in your overall financial plan.

What are the main benefits of maxing out my HSA?

There are several benefits to contributing to your HSA each year, ranging from tax savings to their immense potential for growth.

Since your HSA belongs to you and stays with you even if you leave your current employer, and because unused funds roll over from year to year, it’s the perfect savings vehicle to allow you to grow a significant balance over time.

HSAs are triple tax-advantaged

HSAs are unique because they are triple tax-advantaged, allowing you to both save and keep more of your money. Let’s break down all three tax advantages: 

1. Contributions to your HSA are tax-free:  If you contribute to your HSA via payroll deduction, these deductions can be made pre-tax, which not only allows you to save on taxes but can also help increase your take-home pay. If you contribute from your post-tax pay, you may be able to deduct your contributions when you file your taxes. The amount of your tax savings will depend on how much you contribute during the year and your income tax rate. 

2. Earnings on your HSA are tax-free: Many HSAs allow you to grow your HSA by paying interest on your cash balance, offering investment options, or both. Any earnings you receive in your HSA are received tax-free allowing you to benefit from compound earnings. These earnings can really add up over time. Want to see how much you could save? Try My HSA Planner to model different scenarios. It’s free to use, even if you’re not an Associated Bank customer.

3. Withdrawals from your account are tax-free when used to reimburse qualified expenses: There are many expenses you can reimburse tax-free with your account, including doctors’ visits, prescriptions, medical equipment, and much, much more. You may be surprised how many everyday healthcare expenses you could be using HSA money to pay!

By maximizing your contributions to your HSA each year, you could easily save a considerable amount of money and reduce the amount you pay in taxes.

You may be able to invest your HSA funds

Investing funds from your HSA is a strategic way to potentially grow your savings over time. If your HSA administrator offers investment options, it’s a great idea to evaluate whether this could be a good option for you. When reviewing your options for investing your HSA funds, there are a few things you should keep in mind:

• Understand Your Investment Options: Before selecting your investments, be sure to thoroughly review all available information, including rates and prospectuses. If you have a financial advisor, they can help you select the options that will best complement your overall investing strategy.
• Assess Your Tolerance for Risk: Your HSA administrator may provide a decision support tool that helps you evaluate your risk tolerance and select funds that align with your goals. If you’re an Associated Bank customer, our integrated investment experience includes a decision support tool. Log into the Associated Benefits Connection Participant Portal today to try it out!
• Maintain a Sufficient Cash Balance: While investing your HSA funds is a potentially good way to strengthen your financial future, remember that you should always reserve a portion of your funds for expected healthcare expenses.

All investments carry some level of risk. It’s recommended that you do your own research and/or speak to a financial advisor familiar with your situation to decide which investment opportunities best align with your lifestyle and financial goals for the future. 

HSAs can offer another source of retirement income

With retirement expenses continually increasing, saving as much as possible is important to help you afford the lifestyle you want. The unique advantages of an HSA make it a great option for building savings you can use in retirement. There are three strategies for using your HSA in retirement:

• Spend on healthcare expenses in retirement: Your HSA can help you pay for medical, dental, and vision expenses throughout your life, but after age 65, you can also use this money for Medicare premiums, long-term care expenses, and more! Saving today can help you afford all these costs without having to stretch your Social Security and other retirement income.
• Cash out your HSA: This option tends not to be as popular because you may not receive the full, tax-advantaged benefits of the account when you directly cash out the funds. After age 65, you may use your HSA funds for anything - including items that are not eligible for healthcare expenses – without having to pay the IRS penalty that would have applied before. However, you will still need to pay income taxes on the funds. This is an option that is best used only in emergency situations.
• Reimburse past expenses after retirement: This is a way to receive money tax-free that you can use for anything you want. To do this, you will need to continue to save in your HSA but pay your healthcare expenses from your other income. Leading up to retirement, save detailed records of all the expenses you paid out of pocket. Then, when you’re ready, you can reimburse yourself for those expenses you paid in the past. There’s no time limit to take the reimbursements, so you can do it whenever you’re ready. And since you’re reimbursing healthcare expenses, it’s tax-free.

Check out our article for a more detailed explanation of how to use an HSA to accelerate your retirement savings.

Set up an HSA today

As discussed, there are significant financial advantages to maximizing your contribution to your HSA each year. 

If leveraged correctly, HSAs can be a powerful tool for saving money. Not only can they be used to cover current medical expenses, but they provide a unique combination of tax advantages, flexibility, and long-term savings potential. 
Before getting started, it’s important to consult with a financial advisor to ensure that maximizing your HSA contribution aligns with your overall financial strategy.
At Associated Bank, we offer HSAs with the features you want and service you’ll love.
If you have any questions about HSAs or are considering opening a new account, please call our Participant Services Account Managers at 800-236-8866 to schedule an appointment or visit us at any of our Associated Bank locations.

Getting the most from your HSA doesn’t have to be difficult, and our team is here to help.