5 Amazing Reasons Your HSA is a Super Savings Account

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!

Hopefully You Don’t Need This!

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?
  1. What health insurance plan do you use?
  2. Do you agree that the HSA is an amazing tool?
  3. What do you invest your HSA account in?

Spread The Wealth!

20 Comments on “5 Amazing Reasons Your HSA is a Super Savings Account”

  1. The HSA is a great tool.

    Our employers do offer high deductible plans paired with an HSA, but we still use a traditional plan paired with FSAs.

    Due to personal circumstances in our family, we are almost always going to utilize our entire pre-tax contributions to our FSAs each year.

    That said, the points you raised above highlight the strong benefits and other points for one to consider to see if an HSA is a good fit for one’s unique needs.

    1. Hi BD Mike, that makes a lot of sense. Everyone’s health situations are different and that means that there could be a better option. Health insurance is a hot topic every year because of this, so many different needs for everyone. What is the FSA limit you are allowed?

  2. Mr. Millennial, Love the HSA for all the reasons you mention. Both my wife and I each have an account. When we do have a health care expense, we pay it from our taxable accounts so the HSA money will continue to be tax sheltered. Tom

    1. You are crushing it! That is the way to do it for sure if you can swing it. The limit is relatively low each year but it has so many advantages. If only our 401(k) contributions were FICA free that would be great!

  3. Once I heard that you can invest anything over $1000 in your HSA I was sold lol. Im usually healthy (Or I avoid the doctor at all costs) so I opted for the cheaper (high deductible) insurance and just added more towards the HSA. I had a baby this year so thats been kind of a hit, but never to my pocket! Just to my HSA. Now that I know what I need, since we want to have the second baby sometime in 2019, I’m going to rev up the savings to have enough on there to cover that with no problem.

    Besides all the benefits you mention, there is some type of power in the automatic contribution lowering your paycheck and forcing you to live by that paycheck. It makes you disregard that money as money that isn’t yours and makes it so much easier to save for these things.

    Thanks for this post!

    1. Maybe you should consider the PPO plan for when the baby comes in 2019 if you can predict that your health insurance bill will be higher for the year. Also if you can swing it I would try to cash flow anything you can out of pocket and leave your money in the HSA for the tax advantages down the road. Thanks for sharing!

  4. I love my HSA for all the tax reasons you describe. I’ve been contributing the max every year since I FIREd.

    Unfortunately, I won’t be able to contribute to my HSA in 2018 because the only reasonable HDHP available on Healthcare.gov was out-of-bounds for an HSA. 🙁

    1. Mr. FF – that’s what happened to me this year because of having an ACA plan. I’m glad I started contributing when I had the opportunity though.

      DM – The HSA is A+ in my book. It was one of the first articles I wrote because I feel so strongly for it. Wait, am I in love…? I have all the funds invested at this point and likely won’t actually be using the money for health expenses, rather as another retirement savings vehicle.

      1. Awesome FTD! It’s 2017 you can be in love with whatever you want no judging here! Good for you on trying to leave the money be and taking advantage of the tax benefits downs the road.

    2. You are already FIREd we can change places if you miss contributing? Great job socking it away all those years that will be a helpful tool for tax planning down the road.

  5. First of all, love the logo!!! Nice work, good sir.
    I’m a huge fan of the HSA. Especially after my accountant reaffirmed all the good stuff they bring in early retirement. I didn’t realize our contributions were tax deductible. DUH!!!

    1. Glad you like the logo! They are a monster of a retirement account. It would be great if everyone was allowed to put more in every year. How long have you been contributing to yours?

  6. You didn’t dive into it, but I like it because of the flexibility it provides. You essentially can keep your HSA open “forever” so you can keep growing the value of it through investments, then when you have high medical bills in retirement (highly likely for most people), you can use it then, tax free. Or you can withdraw in retirement similar to an IRA and get taxed regular income taxes. Really tough to compete with all the benefits HSAs provide. I just wish the contribution limit was higher.

    1. Great point, the contribution limits are relatively low but I will take what I can get. Such an easy win to max that out every year for a better future, thanks for your thoughts.

  7. I love my HSA! I do consider it more of an extra investment account. Especially with the great tax benefits. There is nothing wrong with using it for healthcare costs, but would be a smart play, if you can afford it, to not use it at all while you are younger. Let it build up tax free and use it later on in life when it is much more needed. Give it more time to build up for you. I try to cap mine out each year to take advantage of the opportunity. Especially since the contribution limit isn’t that big. Thanks for sharing.

    1. I think it is one of the easiest wins in finance very hard to beat. That is why it is capped at such a low contribution amount because the IRS doesn’t want to give away to much. If possible holding off on using the money will be a huge benefit down the road in retirement years. Thanks for sharing.

  8. This is a timely piece as I just signed up for an HSA with my employer for the first time. I ran the numbers both ways and switching to the high deductible plan with an HSA should work to our advantage. Basically the money that I would be paying toward premiums on the lower deductible plan will now go to the HSA. Our deductible is obviously higher but the money saved from our premiums will more than cover it. Plus my employer contributes $1,000 which is free money. Add in the potential investment earnings and it is too good to pass up.

    I figure the money I was paying toward premiums is better off in the HSA. If we have a really tough year in terms of medical expenses and we have to drain it, well at least we had the funds there. And if we have a light year for medical expenses we can leave most of the money in the HSA and let it grow. A few years like that are all we need to start growing the account, and it will be there when we really need it as we get older.

    1. Good for you Mike I think your reasoning is sound. I would try to have an emergency fund built up for anything that comes up and use that instead of pulling the funds out. Leaving them be and letting them grow will be huge down the road, just make sure to keep a record of receipts for what you do pay for to support tax free withdrawals down the road. Score on the employer $1k your a third of the way there already!

  9. What’s up DM! I think HSAs are great! We max ours out every year and get a $1k contribution from my employer. In my mind this would be the best retirement account out there save for two things, 1) Contribution limit isn’t high enough and 2) Investment options aren’t the best. Otherwise there is no other account that are triple tax advantaged like the HSA. I don’t plan to touch these funds until we are retired so we currently pay for healthcare costs out of pocket.

    Great website!

    Mr. Widget

    1. Whats up MR Widget! You will be well positioned in retirement with that mentality! Fortunately I have some vanguard funds under my plan so the investment options are good. However, it would be fantastic if the limit was higher to reap more of the tax savings benefits. Thanks for contributing and Happy Thanksgiving!