Whether you're in your 30s, 50s, or 70s, there's a good chance healthcare constitutes one of your major expenses. And unfortunately, it's not always a predictable one.
Sure, you could set aside funds in your savings account to cover your annual deductible and work copays for medication into your budget. But you can't predict when you might fall ill or take a fall, thereby landing in the hospital and getting stuck with a pile of bills. And when you're older and limited to a fixed income that largely consists of Social Security, affording these types of healthcare surprises can be even more difficult.
That's why it really pays to save and invest in a health savings account (HSA) if you're able to do so. And next year, you'll get the chance to pump even more money into your HSA, since the contribution limits are increasing.
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Right now, HSAs max out at $3,650 for self-only coverage and $7,300 for family coverage. Next year, those limits will rise to $3,850 and $7,750, respectively.
Savers age 55 and over can also make a $1,000 catch-up contribution to an HSA. That option will remain in place in 2023.
Not everyone who has an HSA opts to participate, and some people who participate might not push themselves to max out their contributions. But here are three reasons you should.
1. You'll enjoy more tax benefits
HSAs differ from other savings plans in that they offer three distinct tax benefits. Not only do HSA contributions go in on a tax-free basis, but investment gains in these accounts are tax free, and withdrawals are tax free provided they're used for eligible medical expenses.
Other savings plans offer tax breaks, like traditional and Roth IRAs. But no other plan offers three different tax benefits like HSAs, and that alone is reason enough to contribute the max.
2. You'll have a chance to build more of a cushion for retirement healthcare expenses
The good thing about HSAs is that the funds you contribute never expire. That means you can carry your money with you into retirement, when your healthcare costs might be at their highest.
In fact, the best way to capitalize on an HSA is to pay for near-term healthcare costs out of pocket and keep your HSA funds invested. That way, they can enjoy years of tax-free growth.
3. You'll have a lot of flexibility once you turn 65
Because HSAs come with so many tax benefits, as you might imagine, the penalties can be steep for withdrawing funds for nonhealthcare purposes. But once you turn 65, you don't have to worry about penalties at all. That's because at that point, your HSA effectively converts to a traditional retirement savings plan.
What this means is that you'll pay taxes on withdrawals taken for nonmedical purposes -- but you won't face penalties. So the more money you pump into your HSA, the more retirement income you'll have.
It pays to max out
Eligibility for an HSA hinges on your being enrolled in a high-deductible health plan. In 2023, that means a minimum individual deductible of $1,500 and a minimum family deductible of $3,000.
If your plan is compatible with an HSA, then it pays to do what you can to max out your contributions. Doing so could really set you up to better manage your healthcare expenses in the long run.
