Health Savings Accounts (HSAs) have been around for a while, but more recently, people have begun to rethink the optimal way to use them. Because, done right, an HSA can be a lot more than just another way for you to cover your healthcare expenses. It can be a tax-advantaged savings vehicle that forms the foundation of your retirement plan.
An HSA is a type of health-focused savings account that allows you to put aside money for later while qualifying for special tax rules. HSAs have a number of unique characteristics that make them not only a strong healthcare safety net for unexpected health-related costs, but also a great overall retirement savings investment account.
The thing that most people don’t understand about HSAs is that they’re a good idea regardless of whether you actually plan to use them for health related costs. Many people have begun to use HSAs as strictly savings and investment related accounts, purposefully keeping as much money as they can in them to reap maximum investment and tax exemption advantages.
Some experts say that depending on your unique financial situation, an HSA geared towards exclusively savings and investment may be able to beat out other popular retirement savings accounts, such as Roth IRAs.
What are the Advantages of an HSA?
HSAs have a number of qualities that make them ideal for savings and investment, and can be used for more than just healthcare.
One of the key benefits of an HSA is what’s known as a “triple tax advantage.” First of all, when you contribute to an HSA, the amount that you put in (up to an annual cap) is removed from your taxable income.
Secondly, whenever you withdraw funds for qualified expenses that relate to medical care, the money is untaxed.
And finally, any investment growth within the account is tax exempt as well, making it extremely easy to invest and save.
What are the Qualifications for Contributing to an HSA?
To be eligible to contribute to an HSA, you need a High Deductible Health Plan (HDHP). This is a classification of plan that only covers preventative services before the deductible. In other words, by opening an HSA you are accepting some level of risk if you end up needing non-preventative procedures before you have paid your full annual deductible. The lower limit for the yearly deductible that allows you to open an HSA is $1,400 for an individual and $2,800 for a family plan.
While this may seem like a high deductible to start with, keep in mind that only half of the point of an HSA is storing money for future medical costs. The HDHP is more of a buy-in for the investment returns that you can reap with the account once you qualify for it.
Investing with an HSA
Just as with other types of retirement investment programs, HSAs require that you have a defined account in which you will store the fund. You can also choose between a number of different privately managed options that will allow you to have a wealth management company take direction of the HSA off your hands. Either way, your next step will be to decide where and how to invest your HSA money.
Some HSA programs will give you the option of using robotic or otherwise digital tools to automate parts of the investment process, while others will be more human governed. The key here is that any returns that you see from investing within your HSA are immune to taxation. This means you only have to keep up with inflation as you invest, and don’t have to worry about the percentages that the government would be taking off the top if you were investing the same money outside of an HSA.
Your HSA as a Part of your Overall Retirement Plan
Like many types of retirement accounts, HSAs work better the earlier you start them. The difference of 5-10 years might not seem like a lot when you’re in your 20’s, but the difference in return between a total of 25 years and 35 years is huge. Annual return investments stack up far more quickly the more money is in them, and because HSAs have a strict annual cap for how much you can put into them, time is the only variable left to play around with.
Another important thing to remember about HSAs is that if you can wait to withdraw money from the account until you turn 65, you can avoid a 20% fee for using HSA money for non-medical applications. In some ways, this is a low bar to set when contextualizing the HSA as a strictly retirement account. Pretty any other kind of retirement-specific account is also aiming to mature in the individual’s mid-60’s, making this goal extremely reasonable.
HSAs also don’t require you to begin withdrawing money from them at age 72, like a 401(k) style account. This allows you to keep your money in the HSA for as long as you want, taking advantage of the most valuable end years of any retirement account.
Although HSAs provide a great platform for building a strong medical expenses safety net, they have investment uses that arguably outshine other types of retirement accounts. If you can afford the HDHP buy-in of an HSA, it can be an incredibly lucrative retirement tool. This combination of medical peace of mind and strong investment potential is becoming more and more attractive to people in all different parts of their careers.
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