When you talk about retirement, you typically hear words like 401K or IRA. What you should be thinking about is an HSA investment strategy, and here is more info.
Today’s main topic will be helping you understand why and how you need to consider a Health Savings Account (HSA) investment strategy. But first, let us dig into what exactly an HSA is and what it entails.
The easy answer is an HSA is an account with pre-tax dollars contributed by yourself or your employer that can be extra funds for paying qualified medical expenses in a high-deductible health plan. Basically, it is a supplemental way of paying higher medical bills because of a high deductible plan from your employer.
Typically (not always), a company will offer to contribute a certain amount of money each year to your HSA, because they understand their health plan may not be super competitive. Some companies will also offer two different types of health plans; one that is high deductible with an HSA option, and one with a lower deductible (with a higher premium) and no HSA option.
At the first company I ever worked for, it was a real math equation each year to figure out which insurance plan to pick. If you knew you were going to be at the doctor a lot, have major surgery, or planned to try and have kids, you always picked the lower deductible plan.
But, if you were someone that didn’t go to the doctor very often, you were always better to go high deductible and max out the HSA portion of the deal.
Benefits of HSAs:
The biggest advantage of an HSA investment strategy is the tax benefit (in the early years). Every dollar that goes into this account is pre-tax, which means you typically are receiving at least a 20 percent discount compared to paying out of your pocket.
What some folks don’t know is that you can also use an HSA as a retirement savings account. Any money you put into an HSA that isn’t used can be rolled over to the next year. Throughout your life you will be able to use these funds for qualified medical expenses, and then after age 65, you can use for nonqualified expenses (including nonmedical) as well.
You will have to pay tax on the money for nonqualified expenses, but you will not have to pay the 20 percent penalty for non-qualified expenses before the age of 65. There are two things I really want you to think about with the above information.
Item one – if you can max out your HSA, do it. You may not have a ton of medical expenses now, but you never know when something big is going to happen. It’s not something that anyone enjoys thinking about, but it’s just the reality of the world we live in.
Example: During my first four years of working, I contributed the max amount to my HSA and was planning to just carry it forward as much as I possibly could. I never went to the doctor and typically rolled the full amount each year.
I then got married and my wife had a stomach issue and had to do a lot of testing and had a few minor surgeries. At the time, we weren’t thinking about starting a family or anything like that, so we hadn’t even considered the low-deductible option.
Then all of a sudden, the medical bills came rolling in. Our out-of-pocket max was really high, and we had about $5,000 of bills all at once. It’s not outrageous and it wouldn’t have bankrupted us, but we were young and really didn’t have that kind of money to spend.
But it hit me, I have this HSA account that I have stashed away. It had almost $3,500 in it from years of saving, and it really saved us in a time of need. Now, that money was no longer in the plans for our future, but we had it when we needed it.
Item two – you may be sitting there thinking I already have a 401K program, why should I worry about an HSA investment strategy as well? I tend to agree with you, I don’t recommend this as a true retirement program. But remember, your medical costs are going to substantially increase as you get older.
Not only will you be going to the doctor more often, the chances of procedures and medication increase tremendously. You can also use HSA money to pay for long-term care including a nursing home. Again, no one wants to think about these things, but nursing homes can cost thousands of dollars a month and is a burden you don’t want to put on your family.
Don’t choose an HSA investment strategy to build wealth in retirement; build up the funds so medical expenses aren’t coming out of your pocket, or your families’ pocket down the road.
Typically, these funds are easily accessible with a debit card or reimbursement process via your insurer’s website. Just make sure that you keep all your receipts for your records!
Disadvantages of HSAs:
Above I covered a ton of pros for an HSA investment strategy, and while there truly aren’t a ton of cons, there are a couple of items that you do need to keep in mind.
As with any type of retirement account, you should not plan on touching these funds unless it’s for their purpose, which is qualified medical bills. If you take money from this account before the age of 65 for non-qualified expenses, you will not only have to pay the taxes for the income but there will also be a 20 percent early withdrawal penalty.
For two companies I have worked for, I have never seen a cost for having an HSA account, but it is something that can happen, and you need to monitor it. Because of the contributions being before-tax dollars, a small fee won’t matter, but it is something that could add up on you if you aren’t careful.
The other thing to make sure you completely understand is how the money rolls from year to year. For most instances, the money that you provide to the HSA will, without a doubt, just keep rolling if you don’t use the funds.
However, if your employer does contribute to the account, sometimes you will lose those funds if you don’t use them in the calendar year. If that is the case, just stock up on medicine to end the year and reimburse yourself with those funds.
If you have the money to contribute, there really is no downside to an HSA investment strategy, but you do want to make sure you understand all the details. Most large companies have a benefit group that will be able to answer any questions you may have.
Now that you understand what an HSA is and the pros and cons of an account, let’s really dive into what an HSA investment strategy may look like for you.
First thing is to think of an HSA account the same way you do an individual retirement account (IRA) or a 401K account. You must have money in the account to truly invest it, but you will typically have all the same investment opportunities as all your other retirement funds. The difference is that you can withdraw from this one (for qualified medical expenses) and not be penalized.
Just like any retirement account, an HSA investment strategy can hold shares for mutual funds, stocks, or bonds. Just like any traditional retirement account, you’ll want to figure out where you are in life before making investment decisions.
The earlier in your career, the more stocks, and the later in your career, the more bonds you will want to be tied to. Stocks certainly have the most upside, but if you find yourself in a situation where you need the money quickly, you could have to pull it out and take a loss.
So, what makes an HSA investment strategy better than a Traditional or Roth IRA? Well, how often can you say you got a triple tax benefit? That’s right, with an HSA account your contributions are tax-free, the growth is tax-free, and if you spend on qualified medical expenses your distributions are also tax-free.
Another interesting trick for utilizing an HSA investment strategy is to pay yourself back later. Again, this is only if you can afford to wait, and you don’t have any risk of your full HSA balance rolling to the next year.
Where flexible spending accounts require qualified expenses to be from the year of reimbursement, with an HSA you just need to have a receipt. That means you could save $5,000 worth of medical bills, and in 10-years after the money in your account has grown from the investment strategy, request a reimbursement.
Remember, you must keep all receipts for this to work, but if you truly want to reap the full rewards of a rising market, let the money sit in the account as long as you can without taking anything out. You can then just utilize the HSA as an emergency fund (for medical expenses).
The last trick I want to share today on starting your HSA investment strategy journey is a one-time trick. You are able to roll over a maximum of your annual HSA contribution limit for a year (It was $3,600 in 2021) from a traditional or Roth IRA account.
Yes, that means one time you can take tax-deferred money and growth, and just move it to an HSA with absolutely no penalties. There is a scenario where this flexibility can be a huge benefit to you.
For example: if you know you have a year full of big medical expenses, you can convert your IRA to an HSA and use those tax-free dollars at no expense. It may be braces, the birth of a child or any type of surgery that you know is looming.
I remember my dad utilizing this one-time trick when I was in high school and needed to have reconstructive surgery on my knee. My dad owned his own business, so he had an extremely high deductible and the out-of-pocket expenses for my surgery were almost $10,000.
He used this trick to convert his IRA into HSA dollars. I don’t remember the value at the time as the amounts vary from year to year, but this basically allowed him to take from his retirement at absolutely no cost and pay a huge chunk of the bill for my surgery.
Remember though, you do have to be on what’s considered a high deductible plan to be eligible for an HSA, so please check your state guides as they vary.
The standard guideline that will be applicable to most is a minimum deductible of $1,400 for an individual or $2,800 for a family. Additionally, out-of-pocket maxes must be $7,000 for an individual or $14,000 for a family. For 2021, an individual could contribute up to $3,600 in an HSA while a family could put in $7,200.
At the end of the day, you want to give your money the best chance possible to grow on its own. IRAs and 401K plans are tremendous retirement vehicles, but a strong HSA investment strategy can also provide a ton of upside if you execute it properly.
If you are already contributing to a retirement account, and a high-deductible health care plan makes sense for you, why not gain all the other benefits of an HSA?
Remember, not only can you use the money now on qualified medical expenses, but once you hit age 65, you can deduct for any reason and only be taxed for income on non-qualified expenses. It’s extremely difficult to think about medical expenses and all the complications that can happen as we age, but you don’t want to be the person who is caught without enough money.
I always joke with my parents that I’m going to put them in a nursing home where they burn all the food, but we certainly don’t want that as a true outcome. Family is the most important thing for most folks, so plan ahead and make sure your golden years are fully covered.