A Health Savings Account (HSA) is a powerful investment tool for eligible participants. For people pursuing financial independence (FI), the HSA is also one of the first accounts they often choose to max out every year.
What is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is a high-deductible health care plan. If you are eligible, you can enroll through your employer or open one of your own. You can contribute money (with huge tax benefits) to your account and use the money to cover your medical expenses.
Some employers may also contribute to their employee’s HSA.
Contrary to the Flexible Spending Account (FSA), unused HSA contributions do not expire and will continue to roll over into the following year… and the next year… and the next year!
Do I qualify?
To be eligible, you must meet the following:
- Enrolled in a high-deductible health plan
- Not a dependant on someone else’s tax return
- Not enrolled in Medicare
- Have no other health care coverage, except what’s permitted
How does a Health Savings Account (HSA) work?
When you enroll, you decide how much money you want to contribute to your Health Savings Account (HSA). You cannot contribute more than the maximum limit, which changes annually. Currently, an individual can contribute up to $3,550 and families can contribute up to $7,100. Be sure to check for contribution limit changes annually.
Adults listed on the account will receive a debit card or checks via the mail to use the funds. The process is the same as using a regular debit card for normal medical payments or purchases. In addition, if the participant wants to be reimbursed for a qualified medical expense that they paid for out-of-pocket, they can submit a receipt and have the funds returned to them directly.
What are the tax benefits of an HSA?
Pre-Tax or Deductible Contributions:
If you have a Health Savings Account (HSA) through your employer, you can contribute pretax dollars into your account. That means that you do not have to pay tax on the money you contribute.
Also, contributions are taken off of your overall taxable income. For example, if you earn $50,000 a year and contribute $5,000 to your HSA, your taxable income will be lowered to $45,000.
If you are self-employed or opened your HSA without an employer, the money you contribute can be tax deducted when you file your tax returns.
You will not ever pay tax on your withdraws if you use the money for qualified medical expenses.
Investing with your HSA can be the ultimate wealth-building tool. When you invest the money in your HSA, your money grows completely tax-free. Again, as long as you use that money for qualified medical expenses, you will continue to pay nothing in taxes.
What can I use my Health Savings Account (HSA) for?
You can use your fund on hundreds of expenses including:
- Over-the-Counter Medicine
- Shoe Insoles
- Office Visits
- Baby rash ointment
- Long-term care
- Medical alert bracelets
- And much more!
What if I don’t want to use the money for qualified medical purchases?
Under 65 years old:
If you want to withdraw the money in your HSA for non-qualified expenses, you will be charged a penalty and will also be taxed on the amount you withdraw. Currently, the withdrawal penalty is 20%.
For Example, let’s say you want to withdraw $1,000 for a new TV. If your tax rate is 20% and your withdrawal penalty is another 20%, you will be charged $400 in taxes and fees, leaving you with just $600 of the $1,000 you wanted.
Over 65 years old:
If you are over 65 and want to withdraw your HSA money, you will only have to pay taxes. There is no additional penalty to withdraw if you are over the age of 65.
Can an HSA be inherited?
Yes, a Health Savings Account can be inherited in the event that you pass away.
How do I use this as an investment account?
Many people don’t even know that they can invest their HSA funds much like they can invest funds in a Traditional or Roth IRA. However, it is absolutely possible to invest HSA savings into the stock market!
Health care costs increase on average an estimated 5.5% per year. Without a doubt, you should be investing your HSA savings if you want to keep up with rising healthcare costs.
By leaving your money in your account and investing it in the market, you’ll be able to take advantage of compound interest. Your money could grow tremendously.
If you choose to pay out-of-pocket for your healthcare to let your money grow, you need to keep excellent records. (We keep all of our medical receipts on our cloud.)
Not all HSA custodians will invest your HSA money though. If your provider doesn’t invest HSA savings you may need to connect it to a brokerage account that can invest the money. Two examples of brokerages that will invest your HSA are TD Ameritrade and Fidelity.
If you and your family are typically healthy people, you should look into getting a Health Savings Account (HSA). With health care costs constantly increasing, HSAs are a great investment vehicle to plan for your future healthcare costs. The HSA offers an unheard-of triple-tax advantage and you can invest the funds using the power of compound interest.
If you haven’t invested in an HSA but are interested in starting one, you should talk to your employer (or financial institution if you are self-employed) and ask for help setting one up.