HSA, Why you should max out this account – The best retirement account that no one uses.

I am way too excited to write this post. I have such a passion for using an HSA in this way. It doesn’t work well and/or isn’t an option for everyone. But, my number one goal with this blog is to provide all my Money Nerds the information so you can make an informed decision for you and your family.

In this post, I am going to explain my personal favorite retirement account which isn’t necessarily a retirement account at all. But is very arguably the best place to save for retirement… Your HSA.

What is an HSA?

HSA stands for Health Savings Account. An HSA allows you to pay for health-related expenses tax-free. You can use your HSA for pretty much any health-related expense, including doctor’s visits, vision, dental, co-pays, etc.

• Having access to an HSA account requires that you be enrolled in a high-deductible plan.
• You are allowed to contribute up to $3,850 for an individual and $7,7500 for a family (as of 2023)
• Some companies offer an employer contribution. (My husband’s company put $2000/year into his HSA when he enrolled in the high deductible plan. That is not an employer match, meaning we aren’t required to put anything in on our end to receive that money… although we do, and I’ll explain why.
• Simplified: An HSA is a savings account that allows you to avoid paying taxes on health-related expenses.

HSA vs. FSA

Many people mistake an HSA for an FSA or think of them interchangeably. And they are very similar, but there is one very important difference. With an FSA you lose any money you don’t spend in that year. With an HSA you don’t!

FSA: This account belongs to the employer. If you don’t spend the money in it each year you forfeit it.

HSA: This account belongs to you. Any money left over stays in the account. Even if you leave the company, that account and everything in it belongs to you.

Why is an HSA such a powerful tool?

The real power of the HSA is the tax advantages. You deposit your money pretax (usually payroll deducted) and as long as you withdraw the money from your account for a health-related expense, it’s also tax-free upon withdrawal. AND if you invest the money in your HSA it also grows tax-free inside your HSA. That is a triple-tax advantage! If you don’t see how powerful that is then keep reading.

Triple Tax-Advantaged:

1. Put in prior to paying taxes
2. Withdrawn without paying taxes (if withdrawn for medical expenses)
3. You can invest the money in you account and not pay taxes on the gains

If you understand the basics of a 401k, Roth IRA, or other similar tax-advantaged accounts, you should know that typically you pay taxes upfront and withdraw it tax-free, or the reverse being you put in pretax money and pay taxes when you withdraw. In both cases, the money also grows in the account tax-free. That is a DOUBLE tax advantage, but you still pay taxes upfront or down the road. Because, as our friend Benjamin Franklin said “in this world, nothing can be said to be certain, except death and taxes.” But as with any rule, there is always an exception. An HSA is that exception. It is probably the only way you will ever see every dollar of your earned income.

How to use your HSA

Essentially, don’t use it!… WHAT!?!?

You are not required to use your HSA whenever you incur medical expenses. What I do instead is let this account grow, and pay our medical expenses out of pocket. Since any money in your HSA grows tax-free, it is most advantageous to let it grow. It functions like any other retirement account, but if you let it grow and can also pull it out tax-free then that’s when you get the most benefits.

What good is an HSA if I’m healthy and don’t have many health expenses?

Cool, so now we have a lot of money growing in our account, but I can only use it on health-related expenses. If I’m healthy, how am I supposed to use it all up?

First of all, you likely won’t be young and healthy forever. But this is where it gets good. You can withdraw money from your account for past health expenses. All you have to do is save your receipts, and you can pull that money out whenever you need it. This is valid for the time the account has been open. You cant use it on health expenses prior to opening your HSA.

I have already started collecting all my medical receipts, so when I retire I will be able to pull all these expenses together and withdraw money equal to every health expense I’ve had since I was 26. No age requirement, meaning you don’t have to wait until you are 65 to pull this money. Which is helpful for those of us who plan on retiring before the standard retirement age.

And if you’re still unsure if you will be able to use all the money, don’t fret. When you turn 65 you can withdraw your money penalty-free. In this case, it will be taxed as regular income upon withdrawal — the same as the most commonly used retirement vehicle, the 401k. So it’s still best to use it for health expenses, but if you can’t use it all or you need it sooner you have a penalty-free out at 65.

I feel like you still don’t get just how cool this account is!

When you pay taxes, you only see a percent of your earned dollar. To simplify it for this example we’ll say it’s 78 cents for every 1 dollar we earn (If you’re in the 22% tax bracket). But if I use my HSA as a retirement account, I am getting my full dollar plus years of compound interest tax-free.

What’s the catch?

You pay your medical bills upfront. I guess if you think paying upfront for your doctor’s bills is a big downside then you probably weren’t planning on saving for retirement in the first place.

You have to keep track of your qualified medical expenses if you want to be able to withdraw them down the road. A simple spreadsheet works for me.

What are considered qualified medical expenses?

Think about the bills you get from any medical or dental office. Almost all of those should apply.

Your typical medical premiums do not count. However, some types of medical premiums do, such as long-term care, and COBRA coverage.

Some lesser-known items are covered. Over-the-counter medicine (whether or not prescribed) and menstrual care products. Both are considered medical care.

For a comprehensive list, you can go here…

https://www.irs.gov/publications/p969#en_US_2021_publink1000204083