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How the HSA and its Wonderful Triple Tax Advantage Builds Wealth

If you don’t know what an HSA is then you have come to the right place.  HSA stands for a Health Savings Account, but in all actuality, it is so much more.  If you’re anything like how I was about 6 months ago, then you might know what an HSA is, but you likely have no idea about the triple tax advantage that you can receive from them.

I truly think that an HSA is one of the most amazing investment options that you have at your disposal.  It is such a great tool that can be used in so many ways to help you reach your goals.  Essentially, you can put away money straight from your paycheck into an account that is to only be used for health-related issues such as doctor appointments, medicine, etc. 

AREN’T YOU BLOWN AWAY?!

Chances are, you’re not blown away…at all.  And neither was I when I first signed up.  To be honest, I first signed up because my insurance premiums were lower.  I was putting in $25/paycheck, which is nearly nothing, but since I was young and never going to the doctor it was all just being banked in my account.  The more I looked into my insurance, I realized that my HSA has three amazing tax advantages:

1 – Pre-Tax Contributions Fund Your Account

This is by far the #1 benefit in my eyes.  You are able to put pre-tax dollars into your account to pay for all qualified medical expenses rather than using post-tax dollars.  This is a HUGE savings!  Right off the bat you are able to save about 25-30% on the amount that you put in. 

For instance, the maximum that you can put into an HSA in 2019 is $7000.  So, let’s imagine that you conveniently have $7000 of medical expenses in 2019.  If you had a conventional health plan and you’re taxed at 30% then that $7000 of health expenses is going to cost $10,000 of actual earned wages! 

For example, you will have to earn $10,000 at your job, just to have it taxed at 30%, for you to end up with $7000 of cash to pay for these bills.  On the other hand, if you have an HSA, then you will only have to have $7000 of earned wages because it is all pre-tax money.

2 – Your HSA Contributions Will Grow Tax-Free

Yes, that is correct, your contributions will not be taxed at all as they grow in your account.  You have the ability to take your pre-tax contributions and invest them however you might want to. 

You can literally invest them in the riskiest stock in the World if you’d like, although I highly recommend not doing that as the point of an HSA is for when you need to pay for medical expenses, so it would really suck if your investment dropped considerably. 

Common investment types for an HSA consists of Bonds and Index Funds, or things that will inherently carry a little bit less risk than individual stocks.  As a 29-year-old, owning bonds is essentially against my investing code of ethics, but I will put HSA money into bonds due to a much more likely guaranteed rate of return.  At the end of the day, my goal for my HSA is to be there when I need it to be for health bills. 

The risk/reward isn’t worth it to put it into individual stocks as I don’t want to have to “find” money because my investments haven’t done well….being risky is what my retirement accounts are for! 

But, of course, I digress. 

The fact of the matter is that you can invest in literally anything you want, and you won’t pay taxes on a single penny of it!

3 – Tax-Free Withdrawals

With most other tax-advantaged accounts, you’re likely going to pay taxes at some point.  For instance, you’re paying taxes on money going into a ROTH IRA or 401K, you’re paying taxes on money coming out of a Traditional IRA or 401K, and you’re paying taxes on money going into a 529, but that’s not the case with an HSA. 

It truly is tax free. 

You’ve put pre-tax money in, it’s growing tax free, and when you have that medical expense that you want to use it for you can, and you don’t have to pay taxes! 

For instance, if I would put $1000 of pre-tax money into my HSA, and it grew to $1200, and then I had a $1200 expense, I could pay for it all and I never once paid any taxes.  Now that is freaking awesome!  My HSA is through Fidelity, so I even have a really cool debit card that I have linked up for all of my prescriptions online that it just automatically charges.

If you’re sitting here going, “well, this sounds cool and all, but I’m healthy and I plan to be healthy for the rest of my life, so what happens if I have all this money that’s never used?”  Well, two things:

  1. You can’t predict your health, so don’t try.  I’ve known extremely fit and heathy people that have freak accidents happen.  Don’t be over-confident with something that you can’t fully control.
  2. If you retire with money in your HSA, you can pull it out TAX-FREE at the age of 65 for non-medical reasons.  Isn’t that freaking sweet?  So, it can almost be used like another retirement account, but unlike a Roth or a Traditional IRA that only have tax advantages for either money going in or out of your account, this would have a tax advantage on both sides!  The only downfall is that you have to wait until age 65 compared to the age of 59.5 on an IRA.

I strongly encourage you to take a look at your HSA at your insurance provider to see if it makes sense for you.  I literally received my benefits guide for 2020 today at work and I was very excited to take a look at it to see how things were changing in this awesome tool for the next year. 

All in all, if you use an HSA exactly how it’s meant to be used, you’re going to experience some great triple tax advantages, but you can get even more advanced and save that money for retirement and pull it out tax free as well! 

I challenge you to learn more about your options to get a HSA and to seriously consider all of the pros and pros and pros and pros that it might have!