This amazing retirement account is technically not a retirement account. If you take advantage, however, it can be one of the best places to put your money when saving, especially if an early retirement is on your mind. What I’m referring to is a Health Savings Account, commonly referred to as an HSA not to be confused with a Flexible Spending Account (FSA).
An HSA is a tax-advantaged savings account set up for those who are enrolled in a high-deductible health insurance plan. The benefit is that it allows you to contribute pre-tax dollars, the account grows free of any taxes, and then withdraws are made tax-free when you use the funds to pay for qualified medical expenses. They take a triple tax benefit sharing the same benefits as many of the other retirement accounts that we use to save for our later years, including pre-tax contributions, tax-free growth, and tax-free withdrawals!
Avoid Taxes Now
Pre-tax accounts are the ones people are most familiar with. These are accounts such as 401(k)s, 403(b)s, and Traditional IRAs. These are beneficial because you do not pay any income tax on the money you contribute, you only pay tax on the money you withdraw years later. For example, if you make $100,000 a year and contribute $10,000 to your 401(k), you’re only taxed on $90,000. You just saved yourself a pretty penny in the taxes you would have paid and set aside a good chunk of savings for yourself! That’s a great deal in my opinion. And the HSA takes on this pre-tax benefit! In 2018 you are able to contribute $6,900 for a family or $3,450 for an individual plan. In 2019, this limit is raised to $7,000 for a family and $3,500 for an individual.
Avoid Taxes Later
Tax-free withdrawal accounts are those such as a Roth 401(k), or Roth IRA. These work a little different than pre-tax accounts in that if you were to contribute the same $10,000 (using the scenario above) to your Roth 401(k), you would still pay taxes on your $100,000 income, however, the $10,000 grows completely tax-free and withdraws are tax-free. So while the HSA gets to take advantage of the pre-tax contributions, they also take advantage of the tax-free withdrawals.
Health Savings Accounts
For most of us, when we have access to an HSA we simply think of a savings account for our medical expenses. And while that is true in it’s most basic use, the benefits are so much more! Instead of simply thinking of it as a savings account for health expenses, think of it as a super-charged retirement account. The HSA provides the best benefits of both a Traditional IRA and Roth IRA because while you can make pre-tax contributions, saving on taxes now, you can also enjoy the tax-free growth and tax-free distributions that the Roth IRA provides. Where people get caught up is when to use it. Here is the deal. You can ONLY contribute to an HSA while enrolled in a high-deductible health insurance plan, there is no rule stating that is must be used while enrolled in a high-deductible health plan. You can use the funds in the plan, withdrawing them tax-free, as long as you have qualified medical expenses. Again, as long as the qualified medical expenses occurred after the HSA was opened, you can withdraw money from the HSA at any time after incurring the expense to reimburse yourself.
So during this open enrollment season, consider taking advantage of the HSAs amazing benefits and max out your contributions if you can. And keep in mind that many plans allow you to invest your HSA into the market, giving it that extra boost to grow substantially faster. A good low-cost index fund should the trick as long as it meets your goals and risk tolerance in terms of volatility. For more information on HSAs or to determine whether they are appropriate for your situation, schedule a call here.