I put off signing up for an Health Savings Account (HSA) for years because it was confusing and seemed to have a lot of rules and restrictions. You need to have an HDHP (high deductible health plan) in order to get an HSA. HSA funds can only be spent on qualified medical expenses — or else you can be hit with a 20 percent penalty (until you’re 65) and have to pay income tax on the withdrawal. I was hesitant to contribute funds into an account when I was worried it would be complicated to get the money back out.
But participating in an HSA turned out to be a lot easier than I expected, and it has saved me a lot of money. If you do not anticipate having a lot of health care expenses, a high deductible health plan plus an HSA may be a good move. Now that last sentence was key — although there are certain situations where an HSA can be beneficial even if you tend to have a lot of medical care, this financial savings vehicle can be one of the most powerful retirement assets in your toolbelt, especially when you get to the last paragraph of this article!
WHAT IS AN HSA?
An HSA is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP) which is most likely offered by your employer or on the Obamacare marketplace. These funds can be deposited to your account pre-tax (more on this later) by your employer (this is the ideal path, more on that later), or you can make your own contributions and then take the tax deduction later, similar to contributing to an IRA. HSAs are owned by the individual, unlike company 401k’s or pension plans. HSA funds may currently be used to pay for qualified medical expenses at any time without federal tax liability or penalty. Withdrawals for non-medical expenses are treated very similarly to those in an IRA in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier.
Key point here is, you have to be dilligent about preserving your medical expense invoices/receipts as well as your yearly tax returns, but essentially if you pay out of pocket for medical expenses in 2018, you can pay yourself back any number of years later, and use the money for whatever you want — all while it’s been growing tax free all those years! Oh yeah, and your spouse and dependents bills can be reimbursed as well, even if they are not on your HDHP! How cool is that!
TAX ADVANTAGES OF THE HSA
There are four amazing tax advantages of an HSA that make it one of the, if not THE best savings vehicles geared towards your retirement:
#1: Your contribution is subtracted from your gross income for the year, thereby reducing your AGI and may make you eligible for other tax advantages such as a lower tax bracket or being able to contribute to a ROTH IRA.
#2: Assuming qualified withdrawls, you never pay tax on that contribution. With traditional 401k or IRA contributions, you have to pay tax on that contribution – at ordinary tax rates no less – upon withdrawl.
#3: When you pick an HSA custodian that lets you invest unused funds for the future, any interest, dividends or capital gains are completely tax free per qualified withdrawl!
#4: This one is the kicker and my favorite part — but is only realized if you make your contribution via payroll deduction through your employer. Your employer will not deduct payroll taxes (Social Security, Medicare) from your contribution — saving you 6.2% and 1.45% respectively! 401k, ROTH and Traditional IRAs all have these taxes taken out, regardless of the other tax implications. If you purchase your own private insurance, you won’t benefit from this last tax break, but you still enjoy the first three!
THE GAINS ARE INSANE
Not taking into account #4, and assuming an 8% avg return (which the last paragraph of the article gets into), if you started making the max contribution annually and didn’t withdraw, ever — in 20 years your HSA would be $292,970 (Single) or $581,632 (Family)!! Man, if only I’d started contributing right out of college instead of in my 30’s! In 30 years a family account would have $1.5M! That would certainly help with medical expenses, don’t you think? Or, give yourself a nice monthly retirement withdrawl at your current taxrate while the rest of the balance continues to grow tax-free.
CONCLUSION
The last cool thing about HSAs are that many custodians allow you to invest the same way you invest your other retirement accounts – in mutual funds, stocks, bonds, ETF’s etc. If you know what you’re doing, hitting 8% is not too hard. That’s IF you know what you are doing. The above numbers were based on that 8% average return, but what if you could do better — think of the possibilities if your average returns could be 12% or 18% or even higher?? Doing that in the stock market, unless you are an absolute Wall Street pro, is VERY hard — and many people completely bust their nest egg trying. Another investment vehicle is a Self-Directed HSA, similar to a Self-Directed IRA or ROTH IRA which allows you to invest your account contributions in a wide variety of things including Real Estate, Precious Metals, Notes (what we specialize in), and more. These vehicles often bring much higher and more consistent returns than the stock market and have much less volatility. The key, if you’re not comfortable in these industries, is working with someone who is. The cool thing about Self-Directed HSAs, IRAs, ROTH IRAs, and 401k’s is that they allow you to invest in LLC’s, essentially allowing you to place your money with an experienced investor in an arrangement called a Joint Venture, where they do the work and you split the profits at a certain rate agreed upon in writing before you invest. That’s something we do here at Pacific Crest Management, and would love to talk to you if you’re interested in investing in our portfolio of investment vehicles.
But first, you need to read up more on HSAs, understand them fully, and get signed-up. Then you would open a Self-Directed HSA account with a custodian such as Quest IRA or MidAtlantic IRA (I use both). THEN, you could register as a potential JV partner with Pacific Crest Mangement and one of our analysts would reach out to you to discuss your current and future options. Please feel free to reach out to us anytime or speak with your SD-IRA custodian to learn more.
To get all of the information you need about HSAs and High Deductible Health Insurance plans, I highly recommend MAXIMIZE YOUR EARNINGS WITH A HEALTH SAVINGS ACCOUNT by Keith Dorney.