HSA: a tax-free investment opportunity hiding in plain sight

A little over a week ago, the US Treasury announced an extension to file your 2019 taxes. Included in that extension is your ability to contribute to your 2019 Health Savings and Individual Retirement Accounts until July 15th. What deserves some extra attention are the benefits of using a Health Savings Account (HSA) as an investment. Never heard of that? You’re not alone. Only about 5% of people with an HSA utilize them at least partially for investment purposes. The truth is, your HSA is an investment opportunity hiding in plain sight.

If you don’t have an HSA, you might recall it as one of those dry topics brought up by your HR rep during your first day at a new job. What you probably don’t know is that an HSA is a triple tax advantaged account. Trying saying that three times fast. Punny, I know.

What is an HSA?

If you aren’t familiar with an HSA, you can think of it just like a savings account – most come with a debit card so you can easily access those funds. It was created to help offset the costs of out-of-pocket medical expenses. However, that’s a pretty limited scope of what an HSA can really do. More on that in a minute.

Who is eligible for an HSA?

– In order to be eligible to open an HSA you:

– Need to have a high deductible health care plan*

– Can’t be enrolled in any additional health insurance plans

– Must not be claimed as someone else’s dependent

– Can’t currently qualify for Medicare

*This is where it’s really important to do some research. No one can predict the future, but do yourself a favor and start tracking what your annual medical expenses are. Although it can seem less expensive to go with a PPO, EPO, or HMO – gotta love those acronyms – that’s not always the case. Those plans offer lower deductibles, but depending on how often and what types of medical services you use, you may still pay a pretty penny out of pocket on co-pays,  premiums, and the like.

So before you make an assumption on which one makes more sense, gather your actual expense data, consider any life changes that might impact your healthcare costs in the next few years, and do the math.

How does an HSA work?

An HSA allows you to put pre-tax dollars into an account, thereby reducing your taxable income. You don’t pay taxes on the dollars you put in (federally and in most states), and you don’t pay taxes on the dollars you take out for use on qualified medical expenses (on the principal amount or earnings). You’re also able to rollover funds from year to year.

By the way – the list of qualified medical expenses is ridiculously long. That list includes medical expenses for yourself, your spouse, dependents, and in some instances other qualifying relatives. Those funds can be used for chiropractic care, most preventive dental treatments, prescription glasses, contacts…even lead-based paint removal in your home. HSA’s can also cover secondary costs like meals and lodging expenses incurred for traveling to receive medical care.

If you’re thinking you wouldn’t end up spending that money during your lifetime:

– You’re lying to yourself

– If you’re right, that’s just more money you’re investing for retirement in a triple tax advantaged account

Still don’t think your HSA is an investment opportunity?

For some perspective, 65 year-old couples who retired in 2019 are expected to spend about $280,000 cumulatively throughout their retirement on healthcare alone. That’s going to quickly eat into that vision of living out your golden years on a tropical island somewhere.

Obviously there are some estimations here based on variables no one can precisely predict for you, but it’s a really good place to start. Fidelity found the expected healthcare costs to be $150,000 for women and $135,000 for men throughout retirement. No, that is not because us women are costlier creatures, this is based on the predicted lifespan of 87 years for men and 89 years for women. Sorry menfolk, nothing personal here – some really smart actuarial scientists came up with those numbers, not me.

If you’re feeling more and more old as you read this, know that it’s not too late. A 35 year old couple who collectively invests $2,820 per year in an HSA could have over $280,000 by the time they’re 65 (if they don’t take any withdrawals). $2,820 per year for a couple boils down to $117.50 per person, per month. How does that compare to your current HMO or PPO premium?

How is an HSA an investment opportunity?

Remember when I said you could think of an HSA as a savings account? The potential for this type of account is so much greater. You could just leave those health saving funds in a regular account, but the smarter move is to invest it. That’s what the above graph shows with an average of 7% returns in the market. Most (but not all) HSA accounts allow you to invest those funds – so make sure you double check before signing yourself up. Importantly, if you elect to invest, you don’t have to invest all of your HSA funds. If you know you’ll need some to cover medical expenses and the rest you’d like to invest, you’ve got that flexibility.

Should I invest in an HSA instead of something else?

Don’t think of this as an “or” decision. You have the ability to invest in both your HSA and more traditional retirement accounts. But, there are some significant differences between the two that you should be aware of.

While you won’t pay tax on HSA funds used for qualified medical expenses, you will pay tax when you use those funds on anything else. Unlike with a 401K, you aren’t required to start taking withdrawals from your HSA at a certain age. You won’t be able to continue contributing to an HSA after age 65, but that’s a whole lot of non-taxed growth potential. 

The bottom line

An HSA is a creative investment opportunity and gives you a ton of flexibility.

If you have, or are considering switching to a high deductible health insurance plan, this is an incredibly beneficial way to pay for current and future medical expenses tax-free, while also reducing your taxable income each year. 

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