It's funny, given how invested I am in health savings accounts (HSAs)—both literally and figuratively—to think back to how little I knew about them before I started at Fidelity.
Like many young people early in their careers, I was much more familiar with flexible spending accounts (FSAs) when I arrived. But these days, now that I manage a team that specializes in helping employees understand how to prepare for health care issues in retirement, I feel compelled to sing the praises of HSAs—especially to other young investors who might overlook them, as I once did.
In a nutshell, HSAs are a triple-tax-advantaged resource that help those with high-deductible health plans save money for current and future qualified health care expenses, like dental and vision care, out-of-network doctor visits, prescriptions and over-the-counter drugs.
There are 4 key benefits1 of HSAs that people often aren't aware of. The first is that account holders can contribute pre-tax dollars from their paycheck to fund their HSA—or, if they fund it with after-tax earnings, they can still deduct those dollars from their income at tax time, up to the IRS limit. Also, savings can be withdrawn tax-free for qualified medical costs. Another benefit is that remaining balances roll over from year to year, which is not the case with FSAs. And, as balances grow, they can be invested in mutual funds or other investment products, where potential earnings grow tax-free.
The good news (at least to me) is that more and more Americans are realizing the distinct advantages HSAs have to offer. At the end of June 2018, consumers had accumulated $51.4 billion in their HSAs, a year-over-year increase of 20.4%, according to Devenir.2
Here are a few more reasons why it's worth giving HSAs a closer look:
They're an immediate resource for unplanned medical events
Whether it's an expensive ambulance ride or an emergency surgery, having HSA funds available provides precious peace of mind—you won't have to risk falling behind on, say, rent or car payments because of a hefty medical bill. And the money is there to cover unexpected qualified expenses or price increases, too. I remember when a friend had to switch to a costly name-brand prescription from a generic because of an allergic reaction, and used her HSA to cover the substantial price difference until she found a suitable alternative.
If you don't use it, you won't lose it
Unlike the funds put into an FSA, which have to be spent within the plan year, the money you put in an HSA is yours to keep—even if you don't end up needing to use it for health care. And if you invest it wisely, your funds will grow tax-free, too.
The health care landscape is changing
As the cost of health care continues to increase, more and more employers are moving to high-deductible health plans that are better for their bottom line. And the outlook for the cost of health care is sobering: According to a recent Fidelity estimate, a 65-year-old couple that retired in 2018 will need $280,000 to cover health care and medical expenses throughout retirement—a staggering sum that will only increase with time.3
To me, there are few things scarier than the thought of having a medical emergency and not being able to pay for the mountains of bills that follow. Having an HSA goes a long way toward putting those fears to rest.