As part of my last poll, I asked some of my readers – what do you want to read about? One of the interesting answers was “Using your HSA as a retirement account”. That was pretty unique, and I had to do some research on this to find out more about it. Breaking things down, it really comes into learning “How to invest with my HSA” before we can even consider retirement.
Before we get into the weeds, let’s start out with the basics – what is an HSA (Health Savings Account)?
What is an HSA (Health Savings Account)?
As per Investopedia – “A Health Savings Account is a tax-advantaged account created for individuals who are covered under high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover.” This is useful for things like:
- Copays or deductibles
- Qualifying prescriptions
- Certain medical equipment
Interesting advantages and tax savings: Basically the advantage to using this tool is that it allows you to cover medical expenses that your own insurance would not cover or would not cover completely. The other fun part, is that these accounts are tax advantaged. This means that money going into them is not taxed – which could be a 15-30% savings immediately, depending on your tax bracket.
Better yet, money going towards your HSA is not counted towards your taxable income, which could put you in a lower tax bracket if you are closer or slightly over into the next tax bracket category.
How to qualify for an HSA
If you have a high deductible health plan – you may qualify for an HSA. Sometimes the plan and HSA are paired together. I feel this is something is heavily dependent on many factors so it’s hard to give a blanket statement.
For 2018, the contribution limits for a HSA (Health Savings Account) are:
- Individual – $3,450 (which is $50 higher than 2017)
- Family – $6,850 (which is $100 higher than 2017)
Advantages over a Flexible Savings Account (FSA)
What is a Flexible Savings Account (FSA): First off, an FSA is very similar to an HSA. But here are some key differences:
- Max contribution of $2,650 – compared to $3,450 with an HSA or $5,000 for those married and filing jointly – compared to $6,850 with an HSA
- Has a “Use it or lose it” policy – all money in the account is either partially or completely wiped out at the end of the year. Depending on the type of FSA, sometimes they save the last 2 months, or $500 and even nothing at all. It depends on the plan.
This is the cool thing with a HSA. An HSA can roll over from year to year. Why is this so cool? Let’s think of it this way:
- Scenario 1: You are young, and in fairly good health. You choose a high deductible plan and begin to invest in your HSA. You happen to be maxing out your HSA every year. If you do not use this money, you will have $3,000+ rolling over every year. This can be a life saver (literally) if you have a large and unexpected medical expense.
- Scenario 2: You recently received a raise. You are close to the next tax bracket. In an effort to save some money, you choose a health plan with a high deductible. To further compound your savings (tax wise), you choose to use an HSA to offset expenses and save money.
I’m sure there dozens of other combinations, but those are the ones that came to mind first.
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How to invest with my HSA:
Now that we have the basics out of the way, here we are at the main course: How do we invest with an HSA?
According to some research, once you have around $2,000 in your HSA, you have the option to invest (according to Optum Bank). Taken from their site, their steps are as follows:
“To start investing your health savings account (HSA), simply follow these steps:
- Sign in to your HSA and set up your investment account by choosing the funds you want to invest in.
- Indicate the amount you want to transfer into your investment account. The minimum amount that can be transferred at one time is $100. So you will typically need to have a balance of $2,100 before you are eligible to invest (assuming a $2,000 investment threshold).
- To make things easier, you can choose to set up recurring transfers/sweeps. This means that you can choose an amount and any time your account exceeds it, funds will be automatically transferred to your investment account.For example, if you choose $2,000 and your balance hits $2,500, $500 will be swept over to your investment account.
- Before you can use funds from your investment account to pay for qualified medical expenses, they’ll need to be transferred back to your HSA deposit account.”
What can I invest my HSA in? HSA providers can offer numerous mutual funds and ETFs (exchange traded funds).
Are your gains taxable?
The next logical question would be – are your investment gains taxable? As an investment vehicle, an HSA functions like an IRA. This means that your gains will stay within the HSA which makes them tax free. Better yet, if you wait until you are 65 to withdraw these gains, they are tax deferred. Another additional win!
Should you use your HSA as an investment vehicle?
Keep in mind *disclaimer* I am not a certified financial planner/accountant, etc etc. This is merely the opinion of an enthusiast. In my non-professional opinion: Using your HSA strictly as an investment vehicle seems inefficient given it’s design limitations. What I mean by that is that the investible limits are only $3,450 (Single) or $6,850 (Family). Compare this to a typical 401k which you can max out at $18,500 per individual. If your employer doesn’t offer a 401k, consider an IRA (Individual retirement account) which has a contribution max of $5,500 for an individual ($2,050 more than the individual HSA).
As a strict investment vehicle, the 401k wins everytime – especially with an employer match. With a 401k, you are receiving a bonus from your invested amounts being untaxed and your investment gains growing untaxed. You will pay taxes later (in retirement) but your tax bracket will mostly likely be lower then.
What if I my employer doesn’t offer a 401k option: This is becoming more of reality as jobs become less standardized and traditional. In this scenario, I would say invest in an IRA and HSA together. This is done to maximize your tax savings and a great way to grow your wealth on multiple fronts. Not only are you giving yourself a nice barrier of safety with the HSA, but you are lowering your taxable amount with the IRA.
Does your employer offer an HSA? If so, how do you use it? If you have any additions to “How to invest with your HSA” leave them in the comments below!
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