By Thomas O’Banion
A Health Savings Account (HSA) is a smart investment for anyone at any age. But for Millennials in the early stages of their adult lives, opening an HSA in conjunction with a high deductible health plan, and maintaining the account, is a no-brainer.
An HSA is a type of healthcare account that acts like a savings account. Individuals deposit pre-tax money into their account, which can then be used to pay for a wide variety of IRS-approved medical and healthcare expenses. When used as part of an overall financial strategy, HSAs help lower healthcare costs for individuals and families, and can also be used to set aside money to augment traditional retirement savings plans.
HSAs are the only type of healthcare benefit to offer a “triple tax advantage” by allowing account holders to:
- Deposit money into the account tax-free
- Withdraw the money tax-free to pay for qualified healthcare expenses
- Earn tax-free interest and investment income
The ability to put away money tax-free can lead to significant savings in healthcare costs while allowing account holders to build their account balances without paying taxes.
Why HSAs Are So Good For Millennials
HSAs are especially beneficial to Millennials for several reasons. First, Millennials are young and they tend to be in good health. They also have decades ahead of them to use the HSA as a savings vehicle for their retirement years.
Unlike other types of healthcare accounts, HSAs do not have a “use it or lose it” feature. Accordingly, any unused funds at the end of the year automatically roll over to the next year, and can continue to grow tax-free for as long as it remains in the account.
Second, Millennials generally don’t have a lot of medical expenses. As a result, they can put in the maximum annual contribution of $3,500 for individuals or $7,000 for families (in 2020, $3,550 for individuals/$7,100 for families) into an HSA account and spend only a portion of it. The rest can be invested tax-free or earn compounded interest for decades, up until age 65. Putting away several thousand dollars each year (starting at age 20) and investing unused funds for the next 45 years can lead to a significant amount of money by retirement age.
When medical emergencies arise, the HSA owners can take a tax-free distribution to pay for doctors, hospitals, medicines, etc., thereby reducing cash out-of-pocket for those expenses. But as long as Millennials stay relatively healthy, HSAs offer a powerful tool for building a supplementary retirement nest egg.
Additional HSA Benefits
HSAs come with other benefits that make them a valuable financial tool for Millennials. These include:
- Account ownership. With Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs), the employer owns the account. When an employee changes jobs, they can’t take those accounts with them. With an HRA, employers can also limit what type of medical expenses the accounts can pay for. In contrast, individuals own their HSA for life, and the account goes wherever they go. This is especially important for Millennials, who tend to change jobs every few years.
- No minimum contribution limits. HSAs don’t require a minimum monthly or annual contribution. In addition, anyone – employers, parents, spouses, relatives and even generous friends – can deposit money into an individual’s account.
- Easy to set up. These days, many employers offer HSAs as part of their benefits package. If not, an HSA can be easily set up through a bank, credit union, broker, insurance company or financial advisor. The only caveat is that in order to qualify for an HSA, individuals must also have a high deductible healthcare plan (HDHP). When employees change plans and no longer have an HDHP, they can still use the HSA funds to pay for approved expenses, but can no longer deposit additional money into the account.
Health Savings Accounts can benefit every age group, but probably none so much as Millennials. They provide a tax-advantaged vehicle for maximizing savings, and help lower overall healthcare costs at a time when Millennials are most likely to have low healthcare costs.
Thomas O’Banion is the Marketing Communications Manager at DataPath, Inc. DataPath is a leading innovator of technology solutions for consumer-directed healthcare accounts, COBRA, billing, and payments.
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