In our financial planning for clients, we see most everyone aggravated by high health insurance premiums and even higher deductibles and copayments. The price of health care services has gone through the roof in recent years, and almost every attempt to control those rising costs has largely failed.
While the politicians argue over what to do next, it is up to all of us as consumers to save money where we can. Fortunately, there is one unique vehicle – the Health Savings Account, or “HSA” –that can at least help to tame the wild cost of health care.
However, there is much more to health savings accounts than simply controlling health care costs. A number of factors makes the humble health savings account a solid vehicle for long-term investment as well as planning for long-term health care costs. Here are five reasons an HSA could be a valuable part of your investment portfolio.
#1. You Can Take the Money With You
Unlike a flexible spending account, or FSA, the money you put in a health savings account is yours to do with as you wish. Even if the health savings account is sponsored by your employer, the money you contribute can go with you when you change jobs.
Over time, the money in your health savings account could really add up, allowing you to build a solid nest egg for future health insurance premiums, prescription drugs and other necessities. Another nice feature is the wide array of health costs that can be paid with an HSA. For example, acupuncture, chiropractic care, dental procedures (except cosmetic dentistry) and even prescription eyeglasses are eligible expenses.
#2. You Can Use it to Supplement Your Retirement Savings
While the primary purpose of a health savings account is to pay for current health related expenditures, a growing number of people are using these vehicles to supplement their other retirement savings. When you look at the unique benefits of a health savings account, it is easy to see why so many investors have been making that choice.
Since the money in your HSA is yours to keep, you can roll over any unused balances from year to year. If your health care expenses are low this year, you can save the money in your health savings account for future years – or salt it away for your retirement years.
Once you enter retirement, you can use the money in your health savings account to pay for a Medicare supplement, cover high copayments and deductibles or take care of any other health care expenses. Since health care costs are a major factor for many retirees, that health savings account could be a valuable tool in your later years.
#3. You Get a Triple Tax Benefit
It is not easy to find an investment with a triple tax benefit, but an HSA is one such tool. As long as you have a high deductible health insurance plan in place, you can take an immediate deduction for the money you put in your health savings account each year, but the benefits do not end there.
If you invest the money in your health savings account, those funds will also accumulate without taxation. No matter how well your HSA investments do, you will not be taxed on those earnings.
The third tax benefit involves how withdrawals from your health savings account are taxed, or not taxed. As long as you use the money for approved health care expenditures, you will not owe any taxes on those funds either, giving you a rare triple tax savings benefit. And, these health care expenditures don’t necessarily have to be for you….they can be for your spouse or any dependents.
#4. You Can Invest the Money
If you plan to use the money in your health savings account to pay for current year expenditures, you will obviously want to keep those funds safe, but you are free to invest any additional money in the account.
As their balances grow, many HSA holders choose to invest part of that money in mutual funds and other long-term investments. And while this does carry the normal risks of investing, it can also be a way to grow your money over time.
#5. You Can Treat It Like a Roth-IRA
The HSA allows you to pay your expenses first and get reimbursed later from the HSA account. This presents an interesting opportunity, if you’re healthy and don’t go to the doctor that often. If you can afford to pay your medical expenses out of pocket today, you can postpone reimbursing yourself later on in the future, ideally after you reach retirement age. That will allow you to invest and grow that money tax-free in the health savings account in the meantime. As long as you withdraw it for eligible expenses, there will be no tax due. Just hold on to all of your receipts; you’ll need those as evidence of your later reimbursements.
Now, there are some conditions. You have to carefully follow the rules to use an HSA as an investment vehicle.
First, you’ll need to buy a health insurance policy that conforms to HSA requirements.
Second, the contribution limits on health savings accounts allow you to contribute only a certain amount each year. Currently, single individuals can contribute $3,500 a year in their health savings accounts for 2019, and the contribution limits for family plans are more than double that. If you’re 55 or older you can add another $1,000 as a catch up contribution.
You can withdraw funds at any time tax free for eligible medical expenses. However, if you use the funds for any non-medical expenses before you reach age 65, you’ll pay a 20% penalty.
Once you’re 65, you can continue to withdraw funds for medical expenses tax free. But you can also withdraw funds for any reason, and the money will be taxed as regular income.
So the sweet spot is using your HSA to reimburse eligible medical expenses, for you or for family members. If used this way, you get the benefits of an immediate deduction along with the tax-free benefits of a Roth IRA (no tax ever, if used for medical expenses).
Since long term care premiums and related expenses also qualify, it can be an ideal strategy for funding medical and care needs for your later years. So talk to your financial advisor or financial planner about this to see if it’s right for you.
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