This HSA Trend Is Super Encouraging

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The best way to use an HSA is actually to not tap it at all during your working years. Read on to see why. 

Healthcare is an expense that can be burdensome at any time in life. And so it’s important to save for it in some shape or form.

Now in this regard, you have options. You could simply pad your savings account and take withdrawals to pay for medical bills as needed. Or, you could open an HSA (also known as a health savings account) and enjoy a tax break on the money you’re setting aside for healthcare costs.

During the second quarter of 2023, almost 40% of HSA holders contributed more to their plans than they withdrew, reports Bank of America. And that’s a very positive trend.

The best way to use your HSA

It’s true that the point of having an HSA is to have money to tap for medical bills. But it’s also a good thing to have more money going into your account than coming out. In fact, if you’re able to avoid taking HSA withdrawals during your working years, you can benefit from an HSA the most.

Not only do HSAs give you a tax break on the money that goes into your account, but you’re allowed to invest funds you don’t need to withdraw right away. That money then gets to grow tax free, and HSA withdrawals are tax free as long as they’re taken to cover qualifying medical expenses, like copays for doctor visits.

If you tap your HSA every time a medical bill comes up, you won’t be left with as much money to invest. And that means you won’t get to capitalize on tax-free growth in your account.

On the other hand, let’s say you put $300 a month into an HSA over a 20-year period and never take withdrawals during those two decades. Let’s assume that instead, you take money out of your regular savings to pay for medical bills.

Over the past 50 years, the stock market’s average yearly return has been 10%, as measured by the S&P 500 index. Even if your HSA doesn’t do quite as well — say, you only average an 8% annual return — you’ll be left with a balance of about $165,000 in that scenario. That’s a nice balance to carry into retirement, when healthcare expenses might really eat into your income.

Not only can medical issues arise with age, but during retirement, you’re not working (generally speaking) or earning a paycheck. Rather, you may be living on just savings and modest Social Security benefits. So while you may be tempted to tap your HSA during your working years, try to remember that you’re better off reserving that money for retirement, because you might need a large balance at that stage of life to cover your medical bills and avoid financial stress.

Try to leave your HSA alone

If you’re eligible for an HSA, don’t just put money into that account for medical bills and assume you’re all set. Rather, if you can, also put extra money into your savings account so you can keep your HSA invested and simply withdraw from your bank account to cover your healthcare costs.

Of course, for some people, this isn’t possible. And if you can’t afford to contribute to an HSA plus a regular savings account for medical bills, then definitely prioritize the HSA because it gives you the tax break. But if you are able to do both, then you’ll really get to maximize your HSA — and potentially set yourself up to cover healthcare expenses with ease as a retiree.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Bank of America is an advertising partner of The Ascent, a Motley Fool company. Maurie Backman has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.

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