Year-end moves for your HSA

Calculate Loan Interest

When you borrow money, the lender will ask you to repay those funds over time. But banks expect to be paid something in exchange for their services and the risk they take when lending you money. That means you won’t just pay back the money you borrowed. You’ll pay back the loan plus an additional sum, known as interest. Interest is one of the primary ways that lenders, banks and credit card issuers earn a profit. Here’s a look at how interest works and how you can calculate the cost when you borrow money.

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What you don't have to do

3 strategic ways to get the most benefit from your health savings account

HEALTH SOLUTIONS THOUGHT LEADERSHIP

When the time comes to sign up for health insurance, review all of your options (even if you like your current plan) and choose the one that best suits you in a normal year. Consider how much health care you tend to use, and compare all of the yearly costs of your alternatives, including premiums and the amount of costs you will be expected to cover. And make sure your current doctors are in-network before you select a plan, unless you don’t mind changing providers.

Keep an eye out for a plan that you can pair with a health savings account (HSA). An HSA can help you save for qualified health care expenses and can act as a sort of emergency savings account if you have a health crisis. More on that in a moment.

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An HSA may be the most tax advantaged of all savings options. The money you contribute isn’t subject to federal income tax, earnings accumulate tax-free, and withdrawals are not subject to federal income tax when they’re used for qualified medical expenses.

As the end of this crazy year approaches — finally! — your health savings account might be the last thing on your mind. But it deserves at least a few minutes of your attention.

You may find you have more money in your health savings account (HSA) than you would expect at this time of the year. HSA spending dropped off this spring, as people postponed elective procedures and turned from in-person doctor appointments to telehealth visits. This may present you with an opportunity to think about your HSA a little differently: as a vehicle for long-term saving, as well as a tool for smart saving. But first …

If you find you have an extra few hundred dollars in your HSA, you don’t have to rush out to find something to spend it on.

It’s common to confuse the key features of an HSA with those of a flexible spending account, or FSA.

FSAs typically have a “use it or lose it” feature, which means you lose the money left in the account at the end of the year (with limited exceptions).

An HSA is different. The balance in an HSA is yours to keep from year to year, from job to job, even from career into retirement.

FSA

HSA

Just because you may have spent less on health expenses this year doesn’t mean the trend will continue. You may even find yourself spending more next year, especially if you postponed any elective procedures during the pandemic.

Similarly, you don’t have to reduce your contribution.

Three savvy moves

Now that you know what you don’t have to do, here are three strategic moves to consider:

Explore your options for investing

These advantages offer a powerful incentive to use your HSA as an investment vehicle in addition to other tax-advantaged accounts, such as your 401(k).

Consider setting a “cash target”

If you want to make the most of your HSA by investing some of the balance, you should decide how much to hold in a core position to cover near-term expenses.

For example...

In general, the amount to keep in your core position should be equal to your expected annual out-of-pocket medical expenses, or your in-network deductible amount. This amount may vary if you feel like you could cover your current expenses from another source.

CORE POSITION AMOUNT

OUT-OF-POCKET EXPENSES

EQUAL

You may think of $2,500 as your cash target.

$5,000

$2,500

Say you had $5,000 in your HSA.

After you’ve hit that number, you begin investing any money above that baseline.

You aim to keep enough cash throughout the year to help pay current medical bills. Of course, you always have the flexibility to change the amount at any time as your needs change.

If you aren’t already making the maximum contribution, consider increasing the amount you set aside in your HSA for next year. Because of the tax advantages of an HSA, Fidelity recommends the following steps to maximize your workplace savings:

Think about contributing more

Contribute to your 401(k) up to the match, and put enough money in your HSA to cover current expenses.

Step 1:

Max out your HSA to get the full tax advantage. This may mean redirecting some of your 401(k) contribution. Remember that you can save in your HSA to pay for qualified medical expenses during retirement, which can be substantial, so this can act as another retirement savings vehicle.

Step 2:

BACK

Contribute to your 401(k) up to the match, and put enough money in your HSA to cover current expenses.

Step 1:

401K

HSA

401K

HSA

Contribute as much as you can to your 401(k), up to the max.

Step 3:

BACK

401K

HSA

If you haven’t contributed the maximum for this year to your HSA, you can make additional contributions all the way up until tax day, April 15, 2021.

April 15, 2021

For 2020, those with individual coverage are capped at $3,550, while those who have family coverage have a maximum contribution limit of $7,100. There also is a “catch-up” contribution for HSAs of $1,000 for those who are 55 or older.

FAMILY coverage

capped at

$7,100

Individual coverage

capped at

$3,550

CATCH-UP CONTRIBUTION

capped at

$1,000

This infographic was designed by Avalaunch Media