The “why” for using an HSA is straightforward, but the “how” can vary depending on financial goals.
First, investors who are enrolled in an eligible HDHP and do not have an HSA may want to consider opening one, whether through an employer or a custodian that offers self-directed HSAs.
“Next, for contributions that are already being maximized to all eligible tax-favored opportunities, including any employer match, nonmatched employer savings, IRAs, or 529 education savings plans, a possible next step is to fully fund your HSA,” said Clifford S. Felton, a Vanguard wealth planning researcher and co-author of the updated paper. “If you pay for near-term medical costs out of pocket, you could invest your HSA assets in low-cost funds that align with your financial objectives and give them the chance to grow and compound for as long as possible.”
However, investors often face budgeting constraints that limit how much they can save. Prioritizing how much to save in which type of account becomes key. What account prioritization order should they consider?
Once an employer’s match is secured on employer plan contributions, it might make sense to save the next dollar in an HSA rather than another type of account.4 The decision then becomes whether it is better to treat the HSA as a vehicle for long-term investment by saving, or to use it like a checking account for present medical expenses by spending. Using the HSA on current expenses allows the investor to harvest the tax benefits today, which is a certainly a positive, but doing also so takes away an opportunity to invest and give those benefits the chance to grow over time.
An investor’s perception of an HSA can evolve as well as balances and eligible expenses accumulate, making it more of a versatile savings option than a pure retirement plan. For instance, what an investor once considered a medical checking account may become an emergency account, college savings account, or long-term retirement savings account.
HSAs can be optimal in preparing for health care costs and saving for the long term. As each investor has unique needs, having a strategic long-term approach with budgeting and investment goals is key to maximizing the power of an HSA and harnessing it as a part of a financial wellness plan.