Do I Have to Keep Money in the Bank for Healthcare Expenses if I Have an HSA?

No matter your age, healthcare bills can eat into your budget and cause you a world of financial stress. In fact, recent data from the Kaiser Family Foundation found that 1 out of every 10 Americans has medical debt, with millions of people owing more than $10,000.

It's important to have money set aside to cover medical bills as they arise. That way, you won't have to rack up costly debt in the course of taking care of your health.

Now, when it comes to socking money away for healthcare, you have choices. You could put cash into a regular savings account and tap it as needed. Or you could fund a health savings account, or HSA, if your health insurance plan renders you eligible for one. This year, for example, your health insurance plan needs to have a minimum individual deductible of $1,500 and a minimum family deductible of $3,000 to qualify.

But what if you're in the habit of funding an HSA? Do you need money in regular savings on top of that?

The quick answer is that no, you may not need money in the bank for healthcare costs if you have an HSA. But you might want separate savings for one big reason.

When you want to make the most of your HSA

The nice thing about HSAs is that your money never runs out on you, whereas with a flexible spending account (FSA), you're generally required to spend down your plan balance every year or otherwise risk forfeiting some of those funds. But another way HSAs differ from FSAs is that they allow you to invest money you don't need to withdraw right away, the same way you can invest funds in a brokerage account or IRA.

In fact, if you avoid tapping your HSA and instead invest your money for many years and allow it to grow, you might get to the point where you have a large sum of cash at your disposal to cover healthcare expenses in retirement, when your medical bills might be a lot higher. So while you can of course tap your HSA as needed to cover healthcare expenses as they arise, you may be better off keeping some money in a regular savings account for near-term medical bills. That way, you'll have the option to keep your HSA funds invested.

A good plan to have in retirement

Since health issues tend to arise with age, it can be helpful to have HSA funds to tap during retirement. But another good reason to reserve some HSA funds for that period of life is that beginning at age 65, HSA withdrawals can be taken penalty-free even if that money isn't used for medical spending.

To put it another way, your HSA could serve not only as a source of healthcare funding in retirement, but also, as your back-up IRA or 401(k). So that's just another reason to keep money in the bank for healthcare expenses, even if you have HSA funds you can withdraw from.