Don't Spend Your HSA Funds
Tips for maximizing this special investment opportunity
A quick overview
Health savings accounts (HSA) are tax-advantaged accounts offered alongside high-deductible health plans (HDHP). With a HDHP, the patient is responsible for paying 100% of these bills until the annual deductible is met, so the HSA provides an attractive way to save for these expenses.
Quick note: there are limits to how much you can put in the HSA - the max contribution per year in 2021 for self-only coverage is $3,650 and $7,300 for a family.
Simple enough, right? Think again.
Before you use those HSA dollars…
Benefit #1: Tax advantages
The tax advantages on both contributions and withdrawals make this an amazing savings and investment account. Contributions lower your taxable income in the current year, while withdrawals for qualified medical expenses are tax free as well. Given these advantages, it's definitely worth prioritizing HSA contributions alongside your 401k (once you've maxed your employer's 401k match - that's free money!). While a 401k requires you to choose between pre-tax Traditional and post-tax Roth contributions, an HSA provides the advantages of both.
Additionally, dividends, interest, and capital gains within an HSA are not taxed.
Benefit #2: Withdraw HSA funds at any time
Another benefit of the HSA account is the option to withdraw funds at any time and without a penalty, as long as it is to reimburse a qualified medical expense. To do this, you need to keep track of all the medical bills you pay without using HSA funds (ie cash or credit card). You can then use the receipts from these transactions to reimburse yourself at any time in the future, as long as the HSA was created before the medical procedure was performed and you don't submit the medical expenses as an itemized deduction.
From IRS guidance: "Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur." (Forbes, 2019)
How to get started
Fund your HSA. Take a look at your budget and figure out how much you can afford to contribute. Given the advantages outlined above, I recommend prioritizing this account in your overall savings plan. To determine if you're eligible for an HSA, check out this overview: Nerdwallet: What is an HSA?
Track your receipts. Start viewing your medical bill receipts as 'withdrawal slips'. My wife and I have a shared folder where we store all of these medical bill receipts. If we ever need to access the HSA funds due to a financial emergency, we can use these 'withdrawal slips' by submitting them to our HSA account and getting a cash deposit to our bank account within a few days. Once we've submitted the receipt for reimbursement, we move it into a "Reimbursed" folder so we don't accidentally submit it a second time.
Invest your funds. Next up is deciding where to push your cash to work. My employer uses HSA Bank, so my investment options are 1) TD Ameritrade self-directed brokerage or 2) Devenir “guided portfolios”.
As for what to invest in, we’ll review some great options in future posts. For now, extra consideration for income-generating assets like bonds, REITs, and dividends are great options to consider given the tax advantages of the HSA.
Watch your money grow. As with any investment, there's risk involved. But the flip side is watching inflation eat away at your cash. So get started!
If you found this insightful, pass along to others who might benefit.