Most people don’t realize that many savings arrangements can also be put into investment accounts. Just like a 401(k) or an IRA, the money in the accounts can grow. Like all investments, there’s no guarantee that the account balance will increase. It could go down, but often you can have just a portion of your money go into an investment account. The rest can stay in a savings account.
If you’re wondering whether or not you’d want to put your health account into investments, consider this: just like how your 401(k) is used for living expenses in retirement, your 401(k) is for your healthcare in retirement.
There are a few simple reasons why a savings arrangement could be considered your best option for building a savings or retirement account.
- Everyone will have future health expenses. Today, the average retired person will spend $285,000 on healthcare costs in retirement
- Using a savings arrangement is like getting a 20% off coupon for your medical expenses.
- This is the only investment tool where money can grow tax free and be taken out tax free when you use it on qualified medical expenses
If you had $50,000 in a 401(k) account and need $10,000 of it for a knee replacement, you’d have to pay taxes on that money. Even at a low tax rate of 20%, you will have to withdraw $12,000 out of your account, $10,000 for your knee replacement and $2,000 to cover the taxes.
Instead, why not put the money in an eligible health savings arrangement and let it grow and let it grow for tax free use. Under this scenario, you would only need the $10,000 for the same procedure.
We can all agree that it’s unlikely that taxes will go down. The money in your 401(k) is taxed as income; however, the money in your eligible health savings arrangement is not taxed at all.
As you can see using the savings arrangement provided by your employer is a very powerful tool for both current and future needs.