Money Management

An HSA is a great account to use for medical expenses. But read on to see why it shouldn’t take the place of an IRA. 

HSAs, or health savings accounts, have been growing more and more popular. As of late 2022, almost 72 million people had an HSA, compared to 67 million in 2021 (according to Devenir).

Now, the nice thing about having an HSA is that you can set aside money for healthcare expenses on a pre-tax basis. In other words, if you put $1,000 into an HSA, you won’t pay taxes on that portion of your income.

HSAs then allow you to use your money whenever you want. Unlike FSAs (flexible spending accounts), they don’t force you to deplete your plan balance year after year. Quite the contrary — HSAs allow you to invest money you don’t need right away to grow your balance into a larger sum. In fact, a good strategy is to save in an HSA during your working years, invest that money, and kick off retirement with a large sum earmarked for healthcare expenses.

You should also know that HSA withdrawals are tax-free when used to cover medical expenses. This holds true whether you take an HSA withdrawal in your 30s or in your 60s.

As you might imagine, you’ll face a penalty for taking an HSA withdrawal for a non-medical expense. But once you turn 65, that penalty goes away, and you can take HSA withdrawals penalty-free for any purpose. In that situation, you simply pay taxes on your withdrawal, the same way you would with a traditional IRA withdrawal.

Because of that, you may be wondering if you actually need an IRA if you’re going to be saving and investing in an HSA. But there’s a very good reason why it’s best to have an IRA along with an HSA.

You need an account you can’t touch right away

The money in your HSA can be withdrawn at any time to cover qualified healthcare expenses. Because of this, it’s dangerous to have your HSA take the place of an IRA.

Let’s say you’re 45 and you want to take an HSA withdrawal of $3,000 to cover a medical bill you’ve incurred. You have every right to do that — that’s what the money is for. But if that HSA is also doubling as your retirement savings plan, and you keep taking withdrawals ahead of retirement, you’ll risk closing out your career without having amassed enough money to cover your senior living costs.

That’s why you’re really better off having both an IRA and an HSA. The former is an account you should pledge not to touch until retirement age (and if you take withdrawals prior to age 59 1/2, you’ll face penalties). But the latter is an account you may need to dip into to cover medical bills so healthcare expenses don’t drive you into medical debt.

HSA eligibility isn’t guaranteed

Another reason your HSA can’t take the place of an IRA? You can contribute to an IRA as long as you have earned income. But HSA eligibility hinges on your health insurance plan meeting certain criteria that can change from year to year. And it may be that you’re able to contribute to an HSA one year, but not the following year.

As an example, this year, you need a minimum individual deductible of $1,500 for your health insurance plan to be compatible with an HSA. Next year, that limit is rising to $1,600. If your current deductible is $1,500 but it doesn’t rise in 2024, then HSA contributions will be off the table for you next year, even if you were able to make them this year.

All told, it’s good to fund an HSA if you’re eligible. But it’s also important to contribute regularly to an IRA for retirement. And you shouldn’t let your participation in one account prevent you from contributing to the other.

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Your checking account might seem like a good place to keep all your cash, but this is a bad idea. Read on to learn why you need a savings account, too. 

It’s important to save money for things like emergency expenses and big purchases. But you’ll need to make a decision about where you should keep the money you are saving.

It may seem convenient to just keep all your cash in the checking account where your paychecks are deposited and where you pay bills from, but the reality is there are some huge downsides to that approach.

In fact, here are three key reasons not to keep your savings in your checking account.

1. Your savings will be too easy to spend

Your checking account is the place where you keep the money you spend regularly. You’ll use the money in checking for bills, but will also likely be able to access it easily by taking cash out of an ATM or by using your debit card to charge purchases.

If you have your savings intermingled with the money you’re using for your expenses, it can be too hard to keep track of what is meant to be reserved and what’s left to spend.

For example, if you have $8,200 in your account but $5,500 is supposed to be saved, you’d have to subtract $5,500 from $8,200 to see what was left over to use for your expenses. Do you really want to have to do the math every time you check how much is available to spend in your account?

2. Tracking your progress on financial goals will be more difficult

If you’re hoping to save money in your savings account for something specific — like a home down payment or an emergency fund — it will likely take you time to build that up.

You’ll probably want to invest a set amount each month — like $300 or $500 or some other figure based on your timeline and the total you need. And you’ll want to check to make sure the money has gone into that account and that your balance is growing on schedule.

If you have your savings in your checking account and you have money going into this account all the time for other things, it can be hard to keep track of whether you’ve deposited enough specifically for your savings goal. You’ll also have to do that pesky math again, but this time subtracting all of the money you’re intending to use for other things to see how much is left over that’s actually saved.

It’s a whole lot easier to just sign into your savings account, see that you deposited the necessary amount that month, and see what your current balance is with one glance.

3. You’ll miss out on interest you could earn

Finally, if you keep your money in a checking account instead of a high-yield savings account, you’re going to miss out on interest that could help your balance grow.

It’s reasonable to expect that you could earn around 4.00% or more on a high-yield savings account right now. If you have your money in a checking account instead, chances are you’ll earn $0 in interest. If you have $5,000 saved and you earn 4.00% on it each year, that will add $200 to your account balance by year’s end. You’d pass that easy (and essentially free) money up if you kept your savings in your checking account.

For all of these reasons, you should keep your savings in a savings account. Research high-yield savings accounts today, open one online, and move your money over now. That way, you can start earning interest on it and remove it from an account where it’s more likely to be spent.

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It’s important to not take on too much house, even as a higher earner. Read on to learn why. 

Home prices are up across the board these days. So even if you’d rather keep the cost of your mortgage payments low, that may not be realistic.

Case in point: The median existing-home sale price in June was $410,200, according to the National Association of Realtors. That’s the second-highest price recorded since January 1999, when the group began tracking that data.

But what if you earn a pretty high salary and can therefore afford a home that’s worth more than $410,200? You may be inclined to go for it, especially if a mortgage lender is willing, based on your income, to loan you the amount you need to pull off that purchase.

But taking on too much house is a move you might regret no matter what your salary looks like. So it’s important to limit your housing costs so you don’t wind up struggling to keep up with your bills.

Don’t get in over your head

If you earn well more than the median salary, then you may be able to afford more than what the median U.S. home costs. That makes sense. But before you sign a mortgage or make an offer, run some numbers to see what you can comfortably swing, keeping in mind that the amount a mortgage lender says you can afford based on your income isn’t necessarily what you think you can afford.

You should also know that as a general rule, it’s best to keep your total monthly housing costs to 30% of your take-home pay or less. And those costs shouldn’t be limited to your mortgage. They should include predictable expenses like property taxes, homeowners insurance, and HOA fees, if those apply to you.

So, let’s say you bring home $10,000 a month after taxes and deductions. That means you can generally afford to spend $3,000 a month on housing.

But that doesn’t mean you should sign a mortgage that will leave you paying $3,000 a month. If you do, you’re pretty much guaranteed to exceed that 30% threshold because you won’t be leaving yourself any wiggle room to cover property taxes, insurance, or other recurring expenses you might bear.

Even high earners can fall behind on housing costs

You might assume that if you earn a large salary, you’re automatically in a good position to buy an expensive house. But that’s not necessarily the case.

If you take on too much house, you risk falling behind on not just your housing costs, but your bills across the board, regardless of your income. So it’s really important to set a home-buying budget carefully.

Also, remember that if you have particularly large expenses that the typical person doesn’t, you may want to stay below the 30% threshold when buying a home. Let’s say you have three young children in daycare, so your child care expenses well exceed what the typical household is looking at. That’s reason enough to limit your housing costs to 25% of your income, or even less.

Earning a large salary does not automatically mean you’re in a good position to buy an expensive house. You may have other bills you’re grappling with, and you may not have a very large down payment, leaving you with a hefty mortgage to cover. So before you rush to buy a home on the pricier side, run some numbers to make sure you’re not making a mistake.

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Think you’re taking a big risk in buying Kirkland products? Read on to see why you might already be familiar with some items that have the Kirkland label. 

If you’ve ever shopped at a discount grocer like Aldi, you may have noticed that many of the brands that appear on the shelves are ones you’ve never heard of. And there’s a reason for that. Aldi intentionally stocks lesser-known brands so it can pass savings onto its customers.

See, the brands people tend to know and love often gain popularity as a result of expensive marketing campaigns and fancy packaging. But that can drive the cost of those products up. As such, it often pays to choose generic brands over name-brand products in the course of your shopping for food and household essentials.

If you’ve ever done any shopping at Costco before, you’ve probably seen the Kirkland name on a host of products. Kirkland is Costco’s signature brand, and loading up on Kirkland items will often result in a lower credit card tab than buying those well-known brands whose manufacturers tend to do a lot of advertising.

But let’s face it — consumers tend to take comfort in the brands they’re already familiar with. And here’s some good news in that regard. A number of the Kirkland products you might come across at Costco are actually made by brands you most likely already know. Here are a few that fall into that category.

1. Kirkland coffee

People tend to be picky about their coffee, and that’s understandable. But you may find it interesting to know that a number of the coffee offerings you’ll see from Kirkland are actually made by none other than Starbucks. Examples include Kirkland’s Signature Espresso Blend Coffee, Dark Roast and Signature House Blend Coffee, Medium Roast.

2. Kirkland cups

Many people recognize Chinet as an established name in the world of disposable plates, bowls, and cups. But Kirkland’s iconic 18-ounce red plastic cups — the ones you’ll often see at parties and barbecues — are made by Chinet, so you can rest assured that they’re bound to be high in quality (or as high in quality as a plastic cup is capable of being).

3. Kirkland aluminum foil

Aluminum foil is a staple item in many households, and you may be eager to save money the next time you need to buy some. But if you’re worried that buying Kirkland aluminum foil is going to result in a product that gives out on you in exchange for that lower price point, fear not. Kirkland’s Signature Foodservice Foil is actually made by Reynolds, who wrote the book on aluminum foil that holds up.

4. Kirkland jelly beans

Jelly beans make an excellent snack, and the more variety you get, the better, right? You can buy a massive jar of Kirkland jelly beans that gives you access to 49 distinct flavors to tickle your taste buds. And if you’re worried about taste, rest assured that Kirkland’s jelly beans are made by none other than Jelly Belly, a fan favorite.

5. Kirkland cranberry juice

When you think of cranberry juice, you probably think of Ocean Spray — it’s been a leading juice cocktail brand for years. Well, you may be happy to know that Kirkland’s cranberry juice is made by Ocean Spray, so you’ll get the same sweet, tangy taste you’ve come to enjoy, whether as a drink on its own or as part of a concoction.

So there you have it. When you buy these Kirkland products in particular, you can rest assured that you won’t be compromising on quality.

That said, even those Kirkland products that don’t have a recognizable name behind them may be products worth bringing home. Remember, Costco prides itself on customer service and is so committed to member satisfaction that it will pretty much take back any item that doesn’t meet your expectations. So you can rest assured that the Kirkland products it puts out are high in quality in their own right.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Starbucks. The Motley Fool has a disclosure policy.

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