What if we told you that your next vacation (hopefully in a pandemic-free environment) could be paid with pre-tax dollars? Yes! And not to forget, it will be tax-free, penalty-free, and in a totally legal way.
Now that we have your total attention, we’ll show you how it all can be possible. But before that, it’s essential to carve out an outline, or as people say, paint a clear picture.
What is HSA?
A Health and Savings Account (HSA) is one of the most underutilized personal finance accounts. Some people don’t even contribute to it, and others who actually do, end up spending from it, every single year.
If this account is managed correctly, a health and savings account can be considered as a really powerful and useful investment account that can allow you the facility of reducing your tax and providing you with an amazing perk of utmost flexibility.
Sadly, most people don’t use their HSAs as wisely as they should, and as a result, they end up giving up on several of the benefits they could have achieved. Join us as we take you through some of the most common mistakes people make with their HSAs.
Mistake 1 – Not contributing enough
Most people live under the impression that maxing out their 401(k) plan should always be their first and foremost priority. Well, we say there are better strategies than that available.
Of course, you can start with contributing an amount that matches your employer’s contribution, but after that, you should start contributing to your HSA. Don’t forget, as per the rules in 2020, individuals are allowed to contribute up to $3,550 to their 401(k) accounts and families can contribute up to $7,100. Meaning, it’s a significant amount you can save at the end of each year.
Mistake 2 – Not investing in HSA
Now you may not agree with us at first here, but just hear us out.
We believe that rather than spending your HSA on medical expenses, try paying for the doctor from your pocket (if possible). This way, you will be able to retain your HSA and possibly invest it for long-term growth. Keep in mind, contributions made to your HSA are tax-deductible and the earnings grow at a better pace, that too tax-free!
And now, let’s discuss the most awaited part.
How can your HSA pay for your next vacation?
By making an active contribution to your HSA and keeping a track of your running expenses, you can essentially save your entire HSA amount for the future, and use it to reimburse for your current running expenses.
Meaning, you could withdraw around $10,000 from your HSA in 2024 and use it to buy plane tickets or cover other holiday costs. This amount is the money you never paid tax on, and now you can easily use it for sponsoring your dream trip. After all, the government paid for a third of it, right?!