Why You Should Care About Health Savings Accounts (HSAs)

Investing Tax Planning

Health Savings Accounts (HSAs) have become a popular extension of health insurance plans over the last 10 years, and will likely continue to grow in popularity. You’ve probably heard of them…maybe you even have one. But did you know that most account holders vastly underutilize their benefits? If you (or anyone in your family) has medical expenses at any point in the future, and you prefer to pay less in taxes, you may be one of these people.

Let’s start with medical expenses. It’s no secret that healthcare is pretty darn costly. It’s also no secret that as you get older, you will be more susceptible to sickness and injury. To summarize: healthcare is expensive now, it’s getting more expensive every year, and you’re probably going to need it the most many years down the road. How are you going to afford those costs? A Health Savings Account, perhaps?

What about taxes? Maybe you’re enjoying your company’s 401k or a traditional IRA because you don’t pay taxes on contributions today. Of course, you have to pay taxes in the future when you withdraw the money. Maybe you’re loving your Roth IRA since you won’t ever have to pay taxes on earnings or withdrawals in the future, even though you’re paying taxes on that money today. But what if I told you that you could get the benefits of both accounts without having to pay any taxes, ever? Sounds too good to be true, but it’s not. And I bet you can guess how: Health Savings Accounts.

Health Savings Accounts, also known as HSAs, are exactly what they sound like: a special savings account created specifically for health care costs. You put some money away each year (up to $3,450 for individuals or $6,900 for families in 2018), let it grow, and then withdraw it when you need to pay for medical expenses. In some cases, your employer may even offer an HSA, or contribute some money for you (although the aforementioned limits are the same regardless of who the money comes from).

What makes this account special is the triple tax benefit. You don’t pay taxes on the money that goes into the HSA, so you save money on taxes today. As the money grows, you don’t pay taxes on earnings. And when you take the money out, you won’t pay taxes on withdrawals, as long as the money is used for qualified medical expenses. When used properly, this is the most tax-advantaged account that exists because you never pay taxes on the money. Can’t find that anywhere else.

Skeptical about what counts as a qualified medical expense? Don’t be; the list is pretty long: http://www.hsacenter.com/what-is-an-hsa/qualified-medical-expenses/. The odds of you or someone in your family having a qualified medical expense at some point is very high, and continues to get higher as you get older. And there’s no “use it or lose it” rule; your money in the HSA can keep accumulating year after year.

Sounds good, right? Save money now to pay for inevitable medical costs in the future, and never owe taxes on that money. But there’s more. If you can afford to pay for expenses out of pocket today, and keep your receipts and records, you can reimburse yourself in the future for the expenses you had today. This allows those HSA to grow tax-free.

You might be thinking that sounds good, but if your money is in a “savings account” it’s not going to grow exponentially because you earn very little on your savings account at the bank. That’s why you need to find an HSA with investment options. Some HSA providers offer the option to invest in mutual funds instead of a cash savings account. While you may be taking more risk and nothing is guaranteed, a good selection of these funds (when constructed appropriately) offers a likelihood of much better long-term growth than cash. Using an HSA as an investment account is the best way to accumulate tax-free money to be used on inevitable future healthcare costs.

Whew! There’s a lot going on with HSAs, so let me leave you with this summary: an HSA can be a great account for anyone with medical expenses, which is practically everyone. But to take full advantage of the triple tax benefit, you can use an HSA as a long-term investment account.

If you have any questions about opening and contributing to an HSA, how to search for providers, want help with an existing account, or anything in between, please let us know. We’d love to help you make use of the most tax-advantaged account that exists.

As always, thanks for reading!

About the Author: Josh Bentz

Josh Bentz, CFP®, Wealth Advisor, helps clients organize and simplify their financial lives by providing comprehensive, personal financial planning. As a Wealth Advisor, Josh provides comprehensive financial planning for clients. He enjoys getting to know individuals and families so he can give specific, meaningful advice. He believes in being a fiduciary and doing what is in the best interest of clients.