HSAs provide flexibility
Unlike other health care accounts, such as flexible spending accounts (FSAs) and health reimbursement accounts (HRAs), there’s no “use it or lose it” restriction on HSAs. They allow you to roll over all your savings from year to year. If you leave your employer, you take your HSA with you. It’s yours forever—which means you can potentially accumulate a sizable long-term balance to pay for health care expenses in the future.
Withdrawals must be used for qualified medical expenses, such as doctor visits, medications, and other expenses that can be deducted on a tax return, but the timing of withdrawals is entirely up to you. You can make a withdrawal at any point in the future for any qualifying expense incurred since you opened the account.
For example, let’s say you pay $2,000 out of pocket this year for your daughter’s braces. Rather than use your HSA funds now to cover that expense, you save the receipt and leave the money in your account. Then, in 10 years when it’s time to pay for her college tuition, not only can you use that receipt to withdraw the funds from your HSA—tax-free—but your account has increased in value thanks to the power of compounding.
It’s important to be aware that if you take a withdrawal without a qualified medical expense, the amount will be subject to income taxes and, if you’re under age 65, a 20% penalty. But HSAs can also be used to pay Medicare premiums (except for Medigap premiums) or to buy long-term care insurance. With so much flexibility, the risk of incurring taxes or penalties is low.