The health savings account (HSA) is a secret little powerhouse if you are serious about financial freedom. Think through your choice when looking at your employers options during open enrollment this fall season. The HSA comes with the high deductible health plan (HDHP) it’s named this because the deductible is much higher than the preferred provider organization plan (PPO). If you are in a situation to cover the deductible for an unexpected medical bill out of an emergency fund then I would recommend this account, let’s take a look why!
1. Tax Free Contributions To HSA
When you contribute money into your HSA the money goes in tax free similar to other pretax plans like a 401(k). This makes a big difference as you save big on your federal taxes if you are in a higher income bracket. The contribution limit for 2018 is $3,450 for a single and $6,900 for a family.
2. Avoid FICA Taxes (Social Security & Medicare)
Most people understand federal taxes as they get the most air time on the news. However, an often forgotten tax is FICA which was created for Social Security and Medicare. This tax is an additional 7.65% out of every check you receive. The HSA is a great way to avoid paying 7.65% on your money that is a great return in itself!
3. Tax Free Growth In HSA
Once your money is in the HSA account you have the option to invest the money. Plans vary as to what investment options are available. Usually the options will look similar to that of a 401(k) plan and you can most likely find something with low fees that matches your investment plan. As this money is invested over the years you will see your balances grow. If this money was in a normal taxable brokerage account you would have to pay taxes on any distributions from the fund as well as capital gains when you sell. With the HSA you are in the clear no need to pay taxes on anything while your money compounds!
4. Tax Free Withdrawals
The majority of those who use this account will use the money for health expenses which is not the end of the world. However, this eliminates the final leg of the triple free tax advantage that makes the account so amazing! If you are in super accumulation mode you should have an emergency fund. Using the emergency fund or cash flowing future qualified health expenses from your paycheck will benefit you the most. This is because if you pay for these expenses now and save the receipts (electronically so you don’t lose them) you can use them later to withdraw money tax free from the account to match those receipts. This means over the years as your money grows you can collect receipts and based on your financial planning use these withdrawals as needed, with no restrictions. Obviously the longer you leave your money to grow the bigger the pot you will have to pull from and that is why you should use this account as part of your financial independence planning!
5. Your Employer Might Contribute To The Account (Free Money!)
Last but not least your employer might make a contribution to your account during the year. This means that the amount you have to contribute out of your paychecks to max out the account might be smaller than you think. This depends on what your employer offers but it can be a nice boost that stacks your retirement for free!
Consider All Options
Health care can be confusing so go to your HR department and ask questions when thinking through your plan. The name of the game is only to have an HSA if you are willing to use it as an amazing retirement account that allows you early withdrawals after paying out of pocket for qualified health expenses over the years. Get the triple free tax advantage and start stacking this account if it makes sense for you!
What Are Your Thoughts?
- What health insurance plan do you use?
- Do you agree that the HSA is an amazing tool?
- What do you invest your HSA account in?