Anyone who holds a high deductible health plan (HDHP) can open a health savings account (HSA). You can build up your HSA fund by adding tax-free funds into it, which you can then use to pay for qualified medical costs. But you might still be curious about how you can maximize the funds.
Among the best things about this savings account is that money withdrawn or earned from it remains tax-free, and it can roll over from one year to the next. It remains under your name no matter who you work for and does so until you retire. Considering you’ll own HSA well onto your retirement, it would be best to put it into its optimal use.
HSA-qualified medical expenses
The IRS defines part of the answer to the question, “what can I use my HSA for?” as they determine the qualified medical expenses. You can check the IRS Publication 502 for the list, but some examples include the following:
- Prescription medicines
- Alcohol, drug, and smoking addiction treatment
- Contact lenses
- Eye surgery and eyeglasses
- Prescription contraceptives and birth control pills
- Long-term care costs
- Artificial teeth and limbs
- Body scan
- Diagnostic devices
- Fertility enhancement
- Hearing aids
- Car installations in a vehicle used by a person with a disability
- Nursing services
- Psychiatric care
- Special education
Ensure to stay up-to-date on what expenses remained covered for HSA funding by checking Publication 502. Some changes might be made that will surprise you when you’re about to settle your bill with your HSA money.
Some items do not qualify for HSA spending. You can still use your HSA funds to pay for these items, but you’ll have to pay a penalty of 20% if you spend the money before you turn 65. These include the following:
- Elective cosmetic surgery
- Funeral expenses
- Health club fees
- Hair removal
- Diaper service
- Future medical care
- Medicines imported from other countries
- Controlled substances
- Babysitting and other childcare expenses for a healthy baby
- Teeth whitening
- Nutritional supplements
- Swimming lessons
- Weight loss programs
These are only a few of the expenses that you can’t pay tax-free using your HSA funds. If you’re trying to cut costs, you might want to avoid spending too much on these items.
Using your HSA funds right
HSA funds do not have required minimum distributions (RMD) so you can leave them untouched for them to grow. You’ll be saddled with a 20% penalty if you use the money for non-qualified expenses. This only changes when you get older than 65.
Using HSA funds for investment
Years have passed and you’ve accumulated some HSA balance. Now, you can use some of these funds to invest in mutual funds, stocks, bonds, and the like. Whatever earnings you’ll get from it, it will remain tax-free. This is one of the biggest reasons people choose the HSA for their retirement fund and why you should carefully decide what you want to use your HSA for.
HSA funds in retirement
Medical expenses should not cause unnecessary worries for you in your retirement if you did not squander your HSA funds and kept up with your contributions. After retiring, here are some more answers to the question “what can I use my HSA for?”
- Pay for insurance until Medicare kicks in. If you retired before turning 65, you would not be qualified for Medicare just yet. Instead, spend some of your HSA funds to cover your premiums for your private health insurance only if you have an employer-sponsored health plan or you’re qualified for unemployment compensation.
- Pay for Medicare. HSA funds can clear some Medicare expenses, but not the Medigap or other supplemental policy premiums.
- Costly long-term care expense. If you need more money to pay for long-term care insurance, your HSA funds can help.
- Fund other medical expenses. When you reach 65, you can use your HSA money for non-qualified medical expenses. You won’t be charged a 20% penalty anymore, but you’ll still need to pay federal and state taxes for your HSA spending.
All these possibilities should show that this savings account is worth it. Given the benefits of putting money in your HSA, it would help if you take extra care in using the funds. Remember the non-qualified medical costs and get the additional guidance you need to learn more about investing money. Make the most out of your HSA by knowing exactly how and when to use it.