Hey Andy – Does HSA Roll Over My Savings from Year to Year?

Recently I was having a conversation with a friend and they told me that they didn’t use an HSA because they didn’t want to lose their money at the end of the year.  It then immediately became clear that many people need to learn more about the HSA because honestly, I think it’s the best retirement tool that one can use!  But let’s first start off by answering, “Does HSA roll over my savings from year to year?”

Short and simple answer here – yes.

You can contribute as much as you want up to the annual contribution limits.  In 2020, those limits were as follows:

  • Individuals – $3,550
  • Family – $7,100
  • “Catch-Up” for those age 55 & older – an additional $1000

The thing is, that even if you were to contribute that $7100 for your family, you don’t have to spend a single penny of that money and you can roll over the entire thing! 

Yes, I said it, and I’m going to say it again – you can roll over your entire HSA savings from year to year.  My friend that initially asked me, “Does HSA roll over my savings from year to year?” was confused with a Flexible Spending Account, or FSA, that does in fact expire at the end of the year.

You might now be wondering why this even matters to you at all and it matters for 1 reason:

The HSA is THE BEST retirement tool that anyone can have.  It’s undeniable.  And if you want to debate me – do it.  My email is [email protected] and I will be more than happy to chat at any time!

Since the HSA will roll over from year to year, it really opens up the triple tax advantage that is provided to you!  Let me explain what I mean.

When I first started working for my company, I opened an HSA for four reasons:

1 – the premium was lower than the standard plan

Since I was a young, healthy human, I knew that I wasn’t going to go to the doctor very often.  I also am a very stubborn person so I have to have a legitimate sickness or injury to actually go to the Doctor.

I felt more comfortable taking the lower premium on the front-end and risking not needing major medical care.

2 – My HSA was funded with pretax money

If I ever had to pay for a $100 doctor visit, I knew that it was only costing me about $75 of after-tax money because of the tax advantages! 

Being a numbers nerd, this was easy to get me convinced to have a HSA.

3 – Money is rolled over from year to year

Because my money rolled over from year to year, even if I wasn’t using it, it seemed like a risk-free way for me to plan for the future. 

My thought was that even if I didn’t use the money until I was 50, then I still would be able to use it.  And naturally, as we get older, our bodies need more doctor expertise, so I viewed it as a forced savings account for me to prepare for the future.  It really was like a “medical emergency fund”, per se.

4 – My employer actually contributed some money to my HSA

I know that not all employers will do this, but it’s something that I would consider you looking to see if your employer does it.

All of these things are great, but I also learned a few other amazing benefits about the HSA the more that I investigated it:

HSA Benefit: You can invest your funds

This is really the bread and butter for why the HSA is truly amazing.  An HSA, in concept, is amazing on its own, but the fact that you can invest your funds makes it so much better!

Like you get these crazy tax advantages, but they wouldn’t really be worth it if it was just sitting in a savings account.  I have my HSA with Fidelity and it allows me to invest in literally anything that I want. 

I can buy ETFs, any stocks, or even just let it sit – it’s literally treated the exact same from an investing perspective.

This might not seem like a huge deal to the average person, but the S&P 500 average since 1950 has been over 10% returns per year while a savings account is going to be much, much lower….

I mean, even a high-yield savings account, which you absolutely need to have, is still going to be way lower.  For perspective, I’ve had my high-yield savings account with Ally for almost two years and it dropped from 2.3% down to .8% APR.  Now, that sounds really low, but my Fifth Third savings account was .01% interest.

That’s not a typo.  It was literally .01%.

So, the fact that we can invest our funds into literally anything that we want, really unlocks a lot of different options for us to be able to maximize our HSA.  But, that’s just one of the few advantages that I learned about after opening one!

HSA Benefit: The Tax Advantage didn’t stop with just the pretax savings that I was getting

In addition to pretax money going in, your savings will grow tax free and you can take them out at any point tax free with no penalty as long as you’re using them for a qualified medical expense! 

I initially thought that it was just the fact that I put pretax money and then when use it whenever I would go to doctor…I mean, you can do that, but you also are way better off the longer that you wait.

What this means is that you can put your money into the HSA, on a pretax basis, invest it into literally anything that you want, and then let it compound as long as you want and take it out later in life…and you paid no taxes the entire time! 

Any other retirement account, like a 401k or an IRA, is going to give you a tax advantage either by allowing you to put pretax dollars in (Traditional account) or by not paying taxes when you take money out (Roth Account) but an HSA will allow you to do both! 

To me, this is really the man differentiating factor that makes an HSA so much more advantageous than most other retirement accounts.  But the fun doesn’t stop there!

HSA Benefit: Reimburse yourself later on in life

This is one that I just recently found out about – you can reimburse yourself for qualified medical expenses years after you actually incurred those expenses.

So, if you spent $1000 on a qualified medical expense in 2020, you could pay out of pocket for that expense but then reimburse yourself in 2023 and still not pay any taxes or fees whatsoever.

If you’re wondering what the advantages of this might be, I think that it really boils down to two things:

1 – the longer that you can let your money sit in your HSA, the better.  As I mentioned above, it is growing tax free so whenever you take it out, you’re not going to pay any taxes on it.

The S&P 500 returns ~10%/year on average, so every year that you can leave that money invested in the market, you’re going to be making an extra 10% and paying no taxes, vs. if you were investing in a normal brokerage account you would have to pay taxes on that 10% gain, meaning you might only make ~7.5/year.

2 – The HSA can basically become a de facto emergency fund.  You can pay for that $1000 expense out of pocket now if you can afford it, and then if things get really tough in the future then you can pull out those funds to use in whatever way that you need!

You just need to make sure that you’re keeping very thorough documentation of your expenses and receipts that you paid for out of pocket from previous years.

Personally, I think that a good way to do this is to just open an excel file and make new tabs for each expenses with the documentation, such as receipts, proof of payments, and maybe a quick couple sentences explaining what the expense was. 

As I mentioned, I had no idea that this was a benefit of the HSA until very recently, and I can promise you that I am going to be taking advantage of this going forward.  Of course, the goal is to never have to touch these funds, but if I ever absolutely needed them, I am going to be very happy that I was keeping documentation of those expenses when that emergency does occur.

HSA Benefit: If you wait until you’re 65, you can pull out your funds for ANY REASON.

Very, very few people know that this can be done.  Many people, including myself when I first started investing, thought that the HSA could only be used for qualified medical expenses.  While that is true for anytime up until age 65, once you turn 65, you can take it out for any reason at all.

A normal retirement account requires for you to be at least 59.5 before withdrawing any money, so the extra 5.5 years is the one negative of an HSA.

But is it actually a negative?  All that this means is that your money is going to stay invested for another 5.5 years.  It might not seem like a big deal, but that extra 5.5 years in the market can be worth nearly double if you pulled it out at 59.5!

Take a look at if you invested the 2020 max HSA contribution ($7100) each year from age 30-59.5 and then to age 65, assuming that you get a 10% return in the market each year:

Pretty dang big difference, right?

I can see a situation where you’d really need the money between 59.5 and 65, but if you just keep a great record of your health expenses throughout the years that you’re paying out of pocket, then you’re going to have a good bank of funds that you can withdraw.

I really think that this is a huge piece of the HSA that just so many people miss.  They are like me and think that they can only use it for medical expenses, which honestly will likely get used as you’re older because healthcare can be so expensive, but you absolutely don’t have to do that.

So, for a quick little summary, the HSA is the best retirement tool because:

  • You can roll over your savings from year to year
  • The deductible is lower
  • Triple Tax Advantage
  • My Employer contributes to my HSA
  • I can invest in whatever I want
  • It’s a de facto emergency fund
  • I can withdraw all funds for any reason at age 65

You cannot find any other retirement account that is even similar to this.  There are so many benefits and basically no cons at all.  Maybe a con that the amount you can contribute is $7100 in 2020?  I mean, even with that the IRA contribution limit is only $6000, so that’s debatably an advantage.

Maybe the con is that you have to wait until age 65 to withdraw funds?  But like I mentioned, I don’t really think that’s a con at all.  I think that forcing you to keep your money invested is actually something that’s going to help out many people.

I really urge you to take a long, hard look at an HSA if you have the ability to use one.  I think they’re a hidden gem that so many people don’t know about and even if they do, they only think about the pretax advantage and the fact that their deductible is lower.

The advantages are so great but it really boils down to the fact that you can roll over your savings from year to year and without that, none of these benefits really exist.

Personally, I like to max out my HSA and then use it only if I absolutely have to.  We just had our first son and some of the bills were so expensive that we did use our HSA to pay for some of it.

Was that the most optimized way to use our HSA?  No.  But part of the point of having the HSA is to be able to use it for medical expenses if need be.  Sometimes life gets in the way and you actually need to use that money, and that’s completely fine as well.

Personally, I invest my HSA into companies that I really trust for the long-term and also some ETFs that are a bit less risky and less volatile.  One of those ETFs that I love is MTUM, a Momentum Investing ETF.  If you think that sounds risky, trust me – it’s not.  All it has done is consistently crush the S&P 500 year after year after year!

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