Nope, this isn’t an exaggeration – an HSA can make you rich by pushing you much closer to your retirement goals! As a tax-advantaged account, an HSA will provide really amazing benefits to those that qualify. If you’re like I was a couple years ago, you’ve probably heard of these accounts but have no idea what they actually are. And even if you do know what an HSA is, you probably don’t know how they can actually act as a vehicle to let you grow your wealth tax-free!
Want to know more? Great, let’s get into it!
What Is An HSA?
A Health Savings Account, or HSA, is an account that lets you deposit money today that will be used for medical expenses down the road. HSA providers give multiple options to pay for these expenses. HSA debit cards let you pay for the expenses right there, and submitting receipts lets you log the expense to be reimbursed later. But this isn’t just a “savings account – your contributions reduce your taxable income and provide tax-free growth. Yep, an HSA can be another vehicle to grow your wealth through long-term stock market investing!
How Does An HSA Work?
The main idea behind an HSA is that you put money in the account (up to $3,650 for an individual or $7,300 for a family in 2022) so that it’s readily available when medical expenses come up. You can deposit this money in several ways. If your employer has an HSA contribution program set up, they can make the deposit like they would to a 401(k) and you won’t even see the money. You can also deposit money from your bank account as needed or on a scheduled cadence.
Why is this better than a savings account, you ask? Yeah, prepare to have your mind blown. An HSA is special because it allows you to take that deposited money and invest it in the stock, ETF, or index fund of your choosing. So as long as you make a wise choice with where this money is invested (here’s why I choose index funds all day!), it will be worth more when you need it than it was when you deposited it.
This is already great, but you’ll recall that I mentioned long-term growth. Let’s get into the really exciting piece that makes the HSA a no-brainer.
Tax-Free Investment Growth
So we’ve covered the fact that you can invest this money and capture tax-free growth in the market. How does this work with a long-term plan? It all comes down to the way you account for your medical expenses. Before getting into it, though, let’s run a hypothetical scenario to see how much the tax-free nature of an HSA can save you. (Lively has a great calculator that I used for this example). Let’s say you and your spouse qualify for an HSA. Here are the variables:
- You each make $75,000 a year
- Your plan is to retire in 15 years
- You invest the 2022 maximum of $7,300 every year (we’ll assume that the max doesn’t increase in this example)
- Your investment of choice grows at 7% annually
You can see that starting from $0, we grow to a shocking $183,441 over that 15 year period. There’s clear value in investing that money instead of letting it sit in a savings account. You’d also avoid paying $18,779 in taxes if you used that money to pay for qualified medical expenses! That’s a huge win just by setting up an account and paying for your medical expenses normally.
The best part about this is that there’s no way you’d pull all that money out at once. The magic of the HSA is that you can log the receipts for your medical expenses today, without pulling out the money today. As long as you keep good track of your receipts (Lively has a great solution for this that I outline a bit later), you can let that money grow indefinitely and pull it out tax-free for the amount on your receipts when you need it. And it can be spent on anything – you’ve already paid for the medical expense.
What Expenses Qualify?
Per the list of qualified expenses from the IRS, you have a wide selection of expenses that you can use to add to your ever-growing stack of tax-free withdrawal tickets (ahem receipts). Some more common examples would be:
- Medical supplies (bandages, etc.)
- Birth control
- Body scans
- Chiropractic services
- Contact lenses, eyeglasses, etc.
- Dental work
- Prescription medicine
- Surgery
- Hospital Visits
- Psychiatric care
- Therapy
The list goes on and on. Some uncommon expenses that qualify might surprise you, though!
- Capital expenditures that relate to medical issues (entrance/exit ramps to your home, railings in bathrooms, widening doorways, etc.)
- Abortion
- Treatment for drug and alcohol addiction
- Special equipment in a vehicle for yourself or a dependent with a disability
- Even fertility enhancement
If you’re interested in digging in deeper, definitely take a look at the detailed list straight from the IRS. You can pay for these qualified expenses out of pocket, file the receipts, then pull the funds out down the road in retirement without paying taxes on them. It’s fantastic.
Who Qualifies For An HSA?
Here’s the big question you’ll probably have: Do I Qualify? The answer is pretty easy to find and will depend on your medical coverage.
2023 Minimum Deductible for a High Deductible Health Plan (HDHP), meaning your deductible has to be at least this amount or greater for you to qualify.
- Individual: $1,500
- Family: $3,000
The maximum amount you can contribute also changes from year to year. You can see that 2023’s changes are pretty significant, increasing by $200 for individuals and $450 for families.
2023 Maximum Annual Contribution
- Individual: $3,850
- Family: $7,750
Now, you may be wondering if you should elect for a high deductible health plan instead of a lower-deductible plan so that you can enroll in an HSA. This will differ from person to person and only you can make that choice for yourself. There are pros and cons to both sides, so do your research and make an educated decision.
Lively: How I Use My HSA
All right, so now I get to talk about how I have my HSA set up to maximize my growth opportunity. Let’s go through it step by step.
- First off, I signed up with Lively as the provider of my HSA. I’ve got nothing but praise for their platform over the years I’ve used them.
- I set up automatic contributions through my bank account so that I will max out my contributions by the end of the year. I verified with my employer that they weren’t able to take the money straight from my paycheck, so I have to do it on my own. The tax benefit comes from a separate form (Form 8889) that reduces my taxable income by the contributed amount each tax season.
- I have a reminder set up for the 15th of every month to move my money from the HSA to my investment account. This unfortunately has to be done manually.
- Once the money is transferred over to the investment account (pretty much instantly) I invest it straight into VTI, my broad-based ETF/index fund of choice. Take a look at my article outlining index funds if you’d like to learn why!
- I take photos of receipts for qualified expenses (or save them to a file if purchased online) and upload a copy to the Lively website. This is logged as a qualified expense. No need to worry about them after that point!
- Watch that compound interest work away to make me more money!
- ???
- Profit
I basically automate as much as I can, set reminders to move the money when It’s available, and let compound interest do its thing. It’s magical and I highly recommend anyone that qualifies to look into an HSA as an additional investment vehicle.
Yes, I’m a very big It’s Always Sunny in Philadelphia fan. How did you know?
