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When I started my new job in 2013, I immediately signed up for the company 401k program and maxed that baby out. CHECK!
For the last two years, my wife and I have both maxed out the contributions on our Roth IRAs. DOUBLE CHECK!
We’re hopeful that this diligent tax favored savings plan of ours will pay dividends (literally and figuratively). Our overall balances have been growing steadily in this bull market and we’re in it for the long run.
But … Now what?
We could always open a taxable brokerage account or look into real estate investing. Those options are definitely on the table, but there has to be another tax advantaged lever that we haven’t pulled yet.
In true “seek and ye shall find” fashion, I stumbled upon another tax favored option I hadn’t been taking advantage of … The HSA.
Before I made the plunge in signing up, I had some questions to make sure this option was right for me.
What is an HSA?
A Health Savings Account (HSA) is just that. It’s a savings account designed specifically for health care expenses. Costs like doctor’s fees, prescription medications, dental treatments and even contact lenses can be covered under an HSA.
You must be signed up for a High Deductible Health Plan (HDHP) in order to participate.
What are the tax advantages of an HSA?
The nice folks at Investopedia have helped me to name several pros for you …
- Pre-Tax Contributions: If you’re signing up for an HSA through your employer, you may have the ability to contribute to your account before taxes are taken out of your salary.
- Tax-Deductible Contributions: If your employer doesn’t have an HSA option (like mine), you can still contribute after-tax dollars and take the deduction during tax time.
- Tax-Free Withdrawals: You can withdraw money, tax-free at any time as long as you’re using the funds for qualified medical expenses.
- Tax-Free Growth: Funds inside an HSA can be invested in stocks, bonds and mutual funds and they grow TAX FREE. Sweet.
I’ve included a quick explainer video from HSA Bank (the company I’m considering since my employer doesn’t provide an HSA):
Do I lose my HSA money at the end of the year if I don’t use it all?
No, you’re thinking about a Flexible Spending Account (FSA). With an HSA, your funds roll over into the next year. In fact, you can invest your money in the stock market so your funds can take advantage of compound interest.
I’m healthy! Why do I need an HSA?
First off, you never know what tomorrow will bring regarding your health. It’s better to have money saved up just in case (especially with the deductibles involved in a HDHP).
If you’re lucky enough to not need the money for health care expenses, the HSA can become another tax-free retirement savings vehicle. All of your unused funds can be withdrawn penalty free at 65 for use on anything (not just health related expenses). You’ll just have to pay the income taxes when you withdraw given that the money was originally contributed pre-tax.
That’s right! It has similar tax and retirement advantages as a Traditional IRA or 401k. See why I’m excited about this option?
What happens with my HSA if I leave my company?
According to the IRS, you’re covered. If you leave your company for a new job, your HSA account comes with you.
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— Andy Hill (@AndyHillMKM) September 23, 2017
Am I eligible?
You must be enrolled in a High Deductible Health Plan (HDHP) to be eligible for an HSA. Pulling from the IRS website again …
“To be an eligible individual and qualify for an HSA, you must meet the following requirements.
- You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
- You have no other health coverage
- You aren’t enrolled in Medicare.
- You can’t be claimed as a dependent on someone else’s 2016 tax return.”
In 2017, HSA contributions for “self-only” are set at $3,400. For families, you are able to go up to $6,750. Each year this changes so make sure to refer to IRS resources for up-to-date information.
What are the disadvantages of an HSA?
Yes, I’m making the HSA sound too good to be true, right? Here is information I learned about the potential downsides (nothing shocking really):
- Fees: Depending on your plan, the balance you carry and the type of transactions you have, there may be some fees. Check out your plan before proceeding so you know what you’re getting into and how to avoid them.
- Penalties: If you use an HSA for non-medical expenses before the age of 65, you’ll incur a hefty 20% penalty. So … don’t do that.
- Taxes: Like the Traditional IRA or 401k, when you withdraw money from an HSA you will have to pay income taxes.
Based on my situation, I feel like an HSA is a good bet for my family. I decided to sign up for one this week.
Honestly, I see the HSA less as a way to save on health care expenses. I see it more as another tax advantaged retirement savings method. It’s really a compliment to my 401k and our Roth IRA accounts.
Even if the money piles up because I’m healthy, my HSA will be another investment account for me to use as I please after age 65. And if my family does need the money for health care expenses, we’ll be covered there too.
Healthy and wealthy. That’s the goal!
What do you think about HSAs?
I’m an HSA noob. What other HSA advantages do I need to discover?
Please know that I am NOT a financial professional. The information that I share is opinion based and shouldn’t be considered as certified financial or legal advice. Thanks!