In the last 2 articles I covered two tax-advantage retirement accounts 401k, and Roth IRA. Now I’m covering The Health Savings Account (HSA), another tax advantaged account with amazing benefits for those individuals with a high deductible health plan. I’ve personally used it for the last 7 years and now take advantage of the investment opportunities it has created for me.
What is a Health Savings Account (HSA)
A Health Savings Account (HSA) is an account for individuals who have a high-deductible health plan (HDHP) that allows them to set money aside for qualified medical expenses. You will typically receive a debit card that would give you access to the funds when visiting the doctor, dentist, or for any other medical-related event all tax-free! Again, the intent of having an HSA, is for people to spend their health care money more wisely.
Before moving on, what defines a high-deductible health plan (HDHP)? An HDHP is a medical plan in which you’ll have to spend at least $1,400 for single coverage, and $2,800 for family coverage.
The HSA is also known for having 3-tax advantages which includes the following:
1. Pre-tax contributions – Your contributions are tax-free just like a 401k! 2. Money grows tax-free – Again, since you’re not paying initial taxes for your contributions, they’ll grow much more. 3. Tax free withdrawals for medical expenses – When visiting the doctor, your payments will be tax-free!
Additionally, in comparison to a Flexible Spending Account (FSA), an HSA is not a “use it or lose it” type of account; therefore, your money will be in your HSA until you spend it. Yes this could for a year, 10 years, 20 years! Finally, you can also re-invest the money in your HSA in the stock market in the form of Mutual funds, or index funds which will allow your money to grow more!
Is an HSA account good for me?
An HSA account is recommended if you’re one of the following
If you’re a relatively healthy person who wants to set specific money aside for their own medical needs.
If you don’t foresee needing to have expensive medical treatments.
If your job contributes to your Health Savings account (Free money!).
Like to take advantage tax-benefits!
If you are currently enrolled in a high-deductible plan (Meaning that you’ll have to spend at least $1,400 for single coverage, and $2,800 for family coverage).
Some reasons why this plan might not work for you.
You don’t have access to a high deductible plan or not enrolled in one
You’re currently in a situation where you can’t contribute extra money to your savings.
You are enrolled in Medicare as this is not considered a HDHP.
You are elderly and/or have other medical needs that would exceed your HSA savings.
If you feel that you would stop going to the doctor or seek medical assistance because you feel it would drain your savings.
If you feel that you would use your HSA money for non-medical related items (which would end up costing you more as this would not be tax-free!)
How much money can I contribute to my HSA?
The table below shows the current contribution limits for 2021 for both individuals and family contributions.
HSA Contribution Details
Current year (2021)
HSA contribution Limit (Employer + Employee)
Individual: $3,600 Family: $7,200
HSA Catch-up contributions (For folks older than 55 years old)
Standard HSA contribution limit + $1,000
If you have any other questions regarding the IRS limits on HSA you may visit their website here.
Can I withdraw money from my HSA?
Again, the intent of having a Health Savings Account is for you to save money for health-related things. Before you think of withdrawing your money, let me remind you of the benefits you will miss out on.
1. Pre-tax contributions – Your contributions are tax-free, tax free! No one will give you that elsewhere, specially if your employer is also contributing to your plan! 2. Money grows tax-free – Again, do I need to remind you of point #1? 3. Tax free withdrawals for medical expenses – You will eventually have to visit the doctor, so why not save some cash when using your HSA money?
Additionally, if you use HSA funds for non-medical expenses, you will not only miss out on the tax-advantages, but you will also be subject to a 20% additional tax for individuals under the age of 65.
Investing HSA funds
Say you have been contributing to your HSA for a while and as you know, you don’t lose your money unless you use it. You’ll find yourself having extra cash on your HSA and might be inclined to withdraw it. Let me remind you that with age, our medical needs will increase and we might as well plan for that. Instead withdrawing it, let’s invest it!
With an HSA, you can invest your funds in either mutual funds, or index funds. This will allow your money to grow over time by the time you turn 65 and have not used all of your HSA money. Your HSA will be treated like a traditional IRA, meaning that you can start withdrawing the money even for non-medical expenses! How’s that for an additional HSA advantage?
This next example from Fidelity.com, gives a hypothetical scenario in which a person invests up to $3,000 for a period of 20 years and a potential yearly growth of 7%.
By the time these 20 years go by a person could potentially have made over $131,596! Which is great for those future medical expenses, or better yet withdrawing them at age 65 and buying ourselves a big gift as a way to congratulate ourselves!
I don’t think I can tell you more about how amazing an HSA is, and the only question I have for you is, what are you waiting for? Even if your employer does not offer an HSA, you can still sign up on your own, and even if you switch jobs, your money will still remain with you!
Remember, your health is your biggest investment! Take care of your body & mind, and let those HSA funds grow!!
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