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What is a Health Savings Account?


What is a Health Savings Account?

Health Savings Accounts (HSAs) have been around for some time.  These accounts have a bit of a bad reputation as qualifying means you are in a high-deductible health insurance plan (HDHP).  However, beyond having higher deductibles these types of accounts are one of the best long-term investment tools.  This is particularly true for healthcare expenses in retirement.  Think of HSAs as your secret weapon against this always increasing expense.  Let’s hit some reasons the HSA is so great.

  • As background, a HDHP insurance plan is one where you have an out-of-pocket maximum of $6,650 and minimum deductible of $1,350 for individuals.  For families these numbers are $13,300 and $2,700 respectively
  • You can contribute $3,450 as an individual or $6,900 as a family to your HSA.  If you are 55 or older you can contribute another $1,000, which brings the total to $4,450 for individual and $7,900 for family. 
  • Here is where I like to call it a Triple Crown – Contributions, Growth and Distributions (used to reimburse yourself for out-of-pocket qualified medical costs) are ALL tax-free!  WHAT?!?  HSAs combine all the best of IRAs and Roth IRAs.  Not only do you lower your taxable income by contributing to it, it also does not add to your income upon distribution like your RMDs do.  Again, distributions have to meet the rules for paying for medical expenses.
  • Sometimes people confused HSAs with flexible spending accounts (FSA).  The big difference is HSAs do not have a “use it or lose it” component like flex accounts.  You never have to worry about losing your savings in a HSA because you did not use the balance.
  • You can contribute to HSAs up until you are 65 and receiving Medicare.  However, unlike IRAs, there are no RMDs (required minimum distributions) with HSAs. You take it out when you need it.
  • Investment choices in an HSA are often larger than what is available through your 401k, however, I still don’t think you should be buying BitCoin in them.
  • If you are under a HDHP through work and an HSA is not available you can go out and get your own HSA.  Just be careful as they can become expensive with administrative and investment fees.  Just like investing in your 401ks and IRAs, you don’t want to pay too much in fees as you will lose quite a bit of your growth to those fees.
  • Now, here is where it gets interesting.  Some of the bigger thinkers in the financial planning world (I am NOT included in this group) have run the numbers and frequently it is more advantageous to max out your HSA before your 401k.  Their analyses showed the HSA is more beneficial if you have a limited amount to contribute toward your retirement including if there is a small match to your 401k.  It all comes down to future tax rates, how HSAs are the Triple Crown, and we know you will have medical expenses in retirement.

Regardless of whether you max out your HSA first, the conversation I often have is to treat the HSA as another leg on the retirement stool.  Yes, you can put money in tax-free and then pull it out quickly to cover those eligible expenses, it may be better to pay those out-of-pocket and let the money in the HSA grow for retirement. 

There are a couple of primary reasons for this.  First, to really get the triple tax-free benefit of HSAs you need to leave the money in the account to grow.  Otherwise, it is a glorified FSA where the only advantage you are getting is the tax-deduction for your contribution.  You are leaving 2/3 of the tax-free benefit on the table by following this method.  The next is healthcare expenses in retirement are not going down.  Estimates are all over the board, however, consensus is the average cost for healthcare in retirement is $250,000.  Maxing out an HSA annually and letting it grow for a decade or two sure would go a long way toward helping cover those costs.   

There are too many benefits of an HSA to not participate if you are eligible.  And, if you are, you may want to consider treating it like another tool for retirement.  Take advantage of this Triple Crown resource that is available out there as we know retirement healthcare expenses are not going away.