91% of HSA participants make this glaring mistake
It's unfortunate that not everyone has access to a health savings account, or HSA, because these savings plans really offer a host of benefits. For one thing, HSA contributions get to go in tax-free, and so maxing one out could result in a sizable near-term tax break.
HSAs also allow you to invest any money you don't need immediately for healthcare purposes. And any gains you enjoy in your account aren't subject to taxes.
Furthermore, HSA withdrawals can be taken tax-free provided they're used to cover the cost of qualified medical expenses. And while there are harsh penalties for removing funds from an HSA for non-healthcare purposes, once you turn 65, you can actually take an HSA withdrawal for any reason penalty-free. You'll be taxed on your withdrawals in that scenario, but that's no different than taking distributions from a traditional IRA or 401(k) during retirement.
But a recent report by the Employee Benefit Research Institute reveals that 91% of HSA owners aren't actually investing the money sitting in their accounts. Rather, they're keeping their balances in cash. And that's a major mistake.
Grow that balance
If you have an HSA, you may be tempted to tap your account when medical bills arise. But actually, a better strategy is to pay for your immediate healthcare bills if you can, and keep as much money as possible in your HSA. That way, you can invest that money and enjoy the tax-free gains we just talked about.
Now you may be hesitant to invest the money in your HSA, either because you're not sure how or you're afraid of taking losses. But if you make a point to leave your HSA funds alone and keep that money invested until retirement rolls around, you could end up with quite a large sum of money at your disposal.
That's important, because Fidelity estimates that the average opposite-gendered 65-year-old couple today will spend an outrageous $300,000 on healthcare costs in retirement. Reading between the lines, if you enter retirement with a host of preexisting health issues, you might spend even more.
Having money available in an HSA could make it so your medical costs are more manageable. But if you want to retire with a pile of money in your HSA, then investing your savings is the way to go.
In fact, it pays to treat an HSA the same way you would a classic retirement savings plan like an IRA or 401(k). Your goal should be to invest in a manner that outpaces inflation and allows to retain your buying power in the face of rising costs -- something Social Security has long fallen short on.
In this regard, investing in an S&P 500 index fund is a good bet. S&P 500 index funds don't require you to do a lot of research, but they do allow you to benefit from broad market gains.
Make the most of your HSA
If you're going to sock money away in an HSA, don't just let it sit there in cash. Go that route, and you might struggle to grow your balance. Instead, make a point to hold off on tapping your HSA for as long as you can and invest your money in the interim. You'll be thankful you did once those medical bills start rolling in during retirement.
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This article was written by Maurie Backman from The Motley Fool and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.
