I love my Health Savings Account. I get the ultimate in tax-advantaged investing.
There are three main, unavoidable forces eroding your wealth over time:
- Taxes
- Inflation
- Fees
You can't stop these forces from reducing your real investment returns over time, but you can minimize them. There are ways to reduce your exposure to inflation risk. With a little looking around, you can make sure you aren't throwing away as much money with investing fees.
With a little tax planning, you can reduce the amount that the government takes. One of the great tools of long-term investing is the tax-advantaged account. Most of these accounts are related directly to retirement. IRAs and 401(k)s immediately come to mind when you think of tax-advantaged accounts. You might even think about the 529, which also comes with certain tax benefits for the beneficiary.
What you may not be taking advantage of, though, is the Health Savings Account. This is another tax-advantaged investment account that can work in your favor if you qualify.
How the Health Savings Account Works
As with most other tax-advantaged investment accounts, there are eligibility requirements for contributing to a Health Savings Account (HSA). You have to purchase a high-deductible health insurance plan, and you have to adhere to contribution limits. But if you qualify for an HSA, it can be a great way to enjoy some tax benefits.
The HSA is the ultimate tax-advantaged investment account because you can get a tax deduction for your contributions — and the money grows tax-free as long as you use it for qualified medical expenses. If you decide not to use the money in your HSA for qualified expenses, it operates similarly to a Traditional IRA but with slightly different penalties. (There is a 20% penalty for withdrawal under age 65, and pay income taxes on the withdrawal.)
And, like other tax-advantaged retirement accounts, you can hold various investments in your HSA. It's possible to hold stocks and bonds in your HSA, as well as cash. Many HSAs are, unfortunately, run similarly to savings accounts, which means low yields. It also means you might have to look a little harder to open an HSA with a custodian/trustee that will allow stocks and bonds. The good news is that companies like Lively can provide you with an easy way to invest through partners.
Because the HSA is an investment account, realize that it is not FDIC (or NCUA) insured. You can lose your money — especially if you decide to invest in stocks or stock funds.
With the HSA, you have some options. I am trying not to use my HSA money right now. I contribute to the HSA regularly, but I try to make my health care payments out of pocket. In the future, I'll (hopefully) have some money built up in the HSA that I can use toward health expenses in retirement — without paying taxes on the withdrawals.
And, of course, if I need to withdraw money during retirement, I'll have to pay the income tax on it. But I plan to try and avoid that. With healthcare costs rising, I like the idea of having the HSA available to provide a tax-free way to pay for health costs in retirement.
