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HSA Fast Facts

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.

  1. 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
  2. You must be covered by a high-deductible health plan to contribute to an HSA (but hey, aren’t we all these days?!)
  3. You never ‘lose’ your HSA, similar to Flexible Spending Arrangements (FSAs) or other annual accounts
  4. You can use your HSA in the future, even if you’re not covered by a high-deductible health plan at the time
  5. 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
  6. 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
  7. 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

The 401(k) Match is Archaic

We’ll admit it. The title of this article is intended to be provocative.  Yet, we stand by our claim and will defend the fact that 401(k) matching contributions really are akin to dinosaurs in the modern employee rewards portfolio. 

First, let’s recognize why matching contributions exist in the first place.  As 401(k) plans began to surge and outnumber traditional pension plans, the responsibility and cost of creating an income stream in retirement shifted from employers to employees.  Employers deemed it a shared responsibility with the employee to save for one’s retirement.  To execute on that shared responsibility, employers offered matching contributions within the 401(k) plan, meaning that an employee would only receive the company contributions to their account as long as they made contributions from their own money as well. Matching contributions incent employees to save money in the 401(k).

Next, we need to realize that 401(k)s are simply one type of tax advantaged vehicle competing for the hard-earned dollars of employees.  In addition, we’ve got IRAs, Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs), 529 College accounts, and the list goes on. All of these ‘accounts’ provide a tax advantage to the person contributing to those accounts. Of particular importance is one of the newest allowed by the tax code: the HSA.  Of even more importance is that HSAs are the most tax-advantaged of any of the accounts noted above.  Many refer to this as the triple tax advantage, and a discussion of such advantage is beyond the scope of this discussion. Rather, we will simply summarize by saying HSAs are better than 401(k)s.

Lets summarize the facts so far. 1) Matching contributions incent employees to save money in the 401(k). 2) HSAs are better than 401(k)s. When summarized together, it’s easy to see how 401(k) matching contributions have become an archaic plan design. 401(k) matching contributions incent employees to save money in a sub-optimal manner, or in an account without the greatest tax advantages to the employees, or in an account that is inferior to another type of account. In the absence of any matching contributions, employees would be advised to put their money into the best account available – the HSA.  This would provide the greatest benefit and advantage to the employee. 

Fortunately, modifying and modernizing the rewards portfolios is relatively easy.  Rather than creating the greatest incentive for employees to save into the 401(k), we might suggest creating the greatest incentive for employees to save into the HSA. Now, if you still want to have a matching contribution in the 401(k) at an even or lesser rate than the HSA match, we’re okay with that too! 

Contributed by Brian Riefepeters of Calder Consulting Group

Connect: (e) Brian@Riefepeters.com (o) 616.235.2442