HSA balances are skyrocketing. Here’s why it pays to save in one

IIt’s no secret that health care is a major expense for workers and retirees alike. But during your senior years, the cost of medical care could skyrocket.

HealthView Services predicts that the average healthy 65-year-old couple who retired last year can expect to spend a huge sum $662,156 on healthcare costs throughout retirement. This number represents out-of-pocket Medicare expenses and projected health care inflation of 5.9% per year.

That’s why it’s so important to set aside money specifically for health care in retirement. And an account becomes more popular in this regard.

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HSA balances are increasing

By January, consumers had saved more than $100 billion in health savings accounts (HSA), according to the consultancy Devenir. And the company also expects HSA funds to reach $150 billion by the end of 2024.

In total, approximately 32 million consumers have an HSA. That’s a pretty impressive number, considering HSAs aren’t open to everyone.

In fact, eligibility for funding an HSA depends on enrollment in a high-deductible health insurance plan. Some consumers prefer a plan with a lower deductible or are not offered a high deductible option by their employers. Medicare enrollees are also not eligible to participate in an HSA. So the fact that so many millions of Americans have one is a good thing.

Still, there are undoubtedly plenty of HSA-eligible people who have not yet funded one of these accounts. And that’s a big mistake, since HSAs are loaded with tax advantages.

The advantage of HSAs

HSAs offer a host of tax breaks that are well worth it. First, HSAs are funded with pre-tax dollars. Traditional IRAs and 401(k) plans receive similar treatment.

Additionally, HSA funds that are not needed immediately can be invested. HSA investment gains are tax exempt. Withdrawals are also tax-free, provided the money is used for eligible healthcare expenses.

It should also be noted that HSAs effectively convert into a traditional retirement savings plan once savers reach age 65. Withdrawals made at a younger age for non-medical purposes are penalized 20%, which is double the penalty for an early withdrawal from an IRA or 401(k).

But at age 65, HSA savers can access their money for any expense and avoid penalties. In this scenario, taxes apply to withdrawals, but it’s no different than taxes that come into the mix with traditional IRAs and 401(k)s.

Don’t pass up a solid savings opportunity

If you have the ability to fund an HSA, it’s worth doing. But if you’re going to go this route, aim to invest your HSA and set aside that money for retirement, when you’re likely to need it most.

Research from Becoming reveals that only 7% of all HSAs have funds invested. This suggests that most savers use their HSAs to cover short-term expenses. While this is certainly allowed, it’s also not the best way to get the most out of an HSA.

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