Health Savings Accounts (HSAs) are the most tax-advantaged savings vehicles available in the United States tax code. As such, these accounts should be used as the primary savings account for one’s future. But the limited knowledge about how these accounts work has mitigated their popularity. It’s only a matter of time, however, until HSAs take over 401(k)s as the leading savings vehicle in America. That’s why we’ve compiled the following HSA fast facts.
- HSAs have a triple tax advantage – meaning you contribute money pre-tax, investments grow tax free, and your withdrawals are tax free – assuming the withdrawals are used to pay for Qualified Medical Expenses
- You must be covered by a high-deductible health plan to contribute to an HSA (but hey, aren’t we all these days?!)
- You never ‘lose’ your HSA, similar to Flexible Spending Arrangements (FSAs) or other annual accounts
- You can use your HSA in the future, even if you’re not covered by a high-deductible health plan at the time
- There is no time limit as to when you need to reimburse yourself from the HSA for a qualified medical expense – meaning you may choose to pay for a qualified medical expense from your checking account and continue to have tax-free investment earnings rack up in your HSA – all while having the ability to take that reimbursement at any time in the future completely tax free
- After becoming eligible for Medicare, you may withdraw from your HSA for any expense (including items that are not qualified medical expenses) without penalty…but you do have to claim the distribution as income and pay ordinary income taxes in that scenario – just like pre-tax 401(k) distributions
- Fidelity Investments just made their individual HSA product available in late 2018 – so an open architecture HSA does exist
Now that you’ve got the facts, let’s talk practically about what it means to have an HSA and optimize the value. We generally suggest using your HSA as a wealth accumulation vehicle with callable tax and penalty free distributions to increase your Financial Agility. Alright, we threw some buzz words in there to gain some points, but we’ll explain it!
First, contribute as much as you can to your HSA and priortize your savings dollars into the HSA before your 401(k), IRA, and 529s (unless you can get free matching contributions in your 401(k)). Second, try not to use your HSA. Instead, pay for your medical expenses out of pocket. But don’t worry, you can always reimburse yourself for these medical expenses in the future when you truly need the cash flow. Hence, this gives you the flexibility to take future distributions without paying taxes or penalties. Think of it is emergency funds that have the ability to be invested and grow tax free. Third, invest your money within the HSA. Take advantage of that tax free growth! Maybe even set up your HSA on a open architecture platform so you have investment flexibility. And that’s pretty much it! Build your wealth with financial agility!
Contributed by Brian Riefepeters of Calder Consulting Group & Calder Investment Advisors.
Connect: (e) Brian@CalderAdvisors.com (o) 616.235.2442