HSA

A health savings account is a taxed advantaged savings/investment account that is available for US citizens that have a high deductible health plan as their health insurance plan. It is intended as an account to save money to be able to pay your deductible, but it has the unique ability to double as an investment account.

Why would you use an HDHP plan?

They have lower premiums than many other health insurance plans. This is a great advantage if you have lower cash flow at the moment. The also allow you to utilize an HSA.

What are the risks of an HDHP?

By nature, they have a higher deductible. This means that you have to pay more of your own money before the health insurance company begins to help with your health expenses. You’re basically agreeing to pay less per month with the expectation that if something happens, you’ll need to pay a bunch of money all at once (my deductible for my wife and I is over $12,000). This is why HDHP plans are generally best for people who are younger and healthy. If all you do is an annual checkup each year, an HDHP (and praying you don’t get into an accident) is likely to be the right move.

Enough about HDHP accounts. What is an HSA?

An HSA is a tax advantaged account that can be used to save for health expenses, and invest for the future. They are triple tax advantaged, which means

• The money is removed from your paycheck prior to paying taxes, lowering your taxable income

• The money grows tax free

• If spent it on qualified expenses (medical expenses) you can withdraw it tax free

This is a huge advantage. If you’re spending the money on medical expenses, you can invest the money tax free, watch it grow, and then spend it, all without paying any taxes. Your money is 100% your money. Even if you don’t spend it on medical expenses, at age 65, you can begin to withdraw from an HSA like you would a traditional 401(k). You’ll still need to pay taxes, but you will always have access to your money.

What if I just let the money grow?

If you save receipts for your qualified medical expenses, you can retroactively reimburse yourself from your HSA account, tax free. Let’s say you pay out of pocket for all medical expenses throughout your life. Then, when you retire, you can write yourself a check for all of those expenses at once. Boom, you just got a huge payday, tax free, for all health expenses that you’ve had throughout your life.

Are there limits to HSA contributions?

Yes, you can only contribute $4150 for an individual and $8300 for a family in 2024. You can add an extra $1000 to this if you are older than 55. Even with these limits, if you start early enough, you can easily become a millionaire on just your HSA contribution before retirement. Here’s what the numbers look like to reach a million dollars with an 8% annual return:

Similar to a 401(k), time is the most important thing, but if you start early enough, you will be able to have your $1 million in your HSA before retirement. Keep in mind, this money can be used for anything in retirement, but it will be taxable if you don’t use it for health expenses. It might be best to use it as an account for all of the health expenses you’ll have in retirement, as most people spend more on health as they age.