An increasing number of Americans are taking advantage of health savings accounts (HSAs), but there are strategies they are not employing to maximize contributions to these tax-advantaged coverage plans.
An HSA is an account where an individual contributes pre-tax dollars for the explicit purpose of spending those funds on future medical expenses. HSAs can be used to cover everything from dental, vision and prescription costs to Medicare premiums.
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One-in-four employees with access to an HSA are now using one, according to a new report from Fidelity. These plans allow pre-tax investments to grow tax-free, and funds can also be withdrawn without penalty.
However, Fidelity says while more people are becoming aware of the tool, they may not be taking full advantage of everything an HSA has to offer.
Contribute the maximum amount possible
The contribution limit in 2018 is $3,450 for individuals and $6,900 for families. Those over the age of 55 enjoy an additional catch-up contribution limit of $1,000.
Fidelity found that in 2017, users contributed on average only half of the maximum allowance.
By increasing those investments, the firm says people can not only save more pre-tax dollars, but they also reduce their total taxable income.
Fidelity found that individuals who saved using both an HSA and a retirement account, such as a 401(k), tended to stash away more cash overall than those who had just a retirement account. HSA users were found to have $119,000 more on average in retirement savings than their counterparts.
Don’t confuse HSAs with FSAs
One common misconception Fidelity found among consumers is that HSA enrollees thought they had to use up all the funds in the account before year’s end or they would lose it.
HSAs, unlike Flexible Spending Accounts (FSAs), carry over from year to year. Beyond that, once individuals reach retirement age, they can access saved funds for other expenses. However, if the funds are withdrawn for anything other than qualified medical purposes, the individual will have to pay regular income tax on withdrawals.
Diversify beyond cash
HSA contributors don’t just need to rely on cash. Many HSA providers offer a variety of options including mutual funds and other investments, which have the potential to generate significant returns.
However, Fidelity found than 46% of HSA account owners didn’t know they could invest anything beyond cash.
This story has been updated.