Overview: The health savings account, or an HSA, is often called the Stealth IRA because it can be treated like another investment account. Reasons for treating it as such include fantastic tax treatment, no income limits, no RMD’s, and the balance will roll over each year. If you can afford to cash flow your medical bills (up to your max out of pocket amount) each year, the HSA is the first investment account you should max out. It’s a great investment deal.
Up until recently, I didn’t have access to an HSA. Now that I have one, I’m excited about using it as another investment account. If you can cash flow your medical bills, I highly recommend you do so as well.
Do you qualify
Your health insurance plan must qualify for you to be eligible for an HSA. At a minimum, you need a $1,500 [2023] deductible for a self plan, or a $3,000 [2023] deductible for a family plan. Once you have an HSA, a self plan will allow $3,850 [2023] a year into the HSA while a family plan will allow $7,750 [2023] per year into the HSA. Once you reach 55, you get an extra $1,000 a year to invest. These numbers go up every year.
The decision to go with an employer sponsored health plan that allows for an HSA verses one that disqualifies you from an HSA may not be easy to make. Carefully look at all the variables before deciding what to do. Things like: what is your family’s over-all health like? Does your employer contribute money to the HSA for free, and if so, how much? What kind of savings do you have to cover the deductible? Do you plan on using the HSA as a way to pay for bills or save for retirement?
My employer puts in a substantial amount of money in my HSA on my behalf for free, so that is the plan we went with. We also plan to bunch our medical procedures (within reason) into the same year to hopefully only hit the max out of pocket every other year or so. I plan on using the HSA as an investment account. But why would I do so?
HSA’s are a good investment
The HSA/Stealth IRA is a great investment because it’s triple tax free. Money comes out of your paycheck and goes into the HSA saving you income and FICA taxes (social security and medicare. The only place this isn’t true is the deepest of blue California and New Jersey.) Then, inside the HSA, it grows tax free. My HSA provider has tons of low fee Vanguard funds to invest in, just like an IRA or 401(k). Then the money can come out of the investment account tax free if it is used for medical expenses. Fidelity also has a great HSA, with no fees.
Each year, your balance will roll over and it will keep growing, unlike an FSA. Finally, once you are 65 and in retirement, the money can still be spent tax free on medical bills like medicare premiums or insurance, or on anything you like if you pay income tax on it, like an IRA. But unlike an IRA or 401(k), there are no RMD’s on the money, there are no income limits for deductibility, and the annual max contribution limits are higher than an IRA.
How does it work
How does this work in a practical sense? Let’s say you have $500 in an HSA and you get a doctor bill for $500. One option would be to take the $500 from the HSA and pay the doctor bill. Easy and over with. But, I think there’s a better way. What if, instead of taking that $500 out of your HSA, you paid $500 out of pocket and left your HSA money alone? $500 growing at 5% over 30 years is over $2,200. $500 today or $2,200 later? If you paid it later, you’d net $1,700.
To make that work, you’d have to take $500 out of savings and pay the doctor bill. You would continue to do this, and over 30 years, your HSA would grow to a huge sum. $7,000 a year into your HSA at 5% for 30 years, is over $500,000. Scan or save receipts for your out of pocket doctor visits. 30 years later, or in retirement, pay yourself back for all those out of pocket expenses you’ve had while your HSA money has been growing and compounding. The hope is that through investment gains and inflation, you come out way ahead. You also avoid taxes in the process.
Another example that’s not so extreme might be needing money for something above and beyond your emergency fund, like a used car or needing a new roof. Use your medical receipts to withdraw your HSA money to pay for the necessity. Obviously it’s best if you can leave these investments alone for 20 years, but having HSA money gives you options, especially before tapping a credit card or 401(k) loan.
Contributions
You can elect to contribute to your HSA via paycheck deduction (recommended) or directly to your HSA provider. I’m normally a front loading fanatic, but in this case, I like the paycheck deduction better. Front loading means you send all $7,000 to your HSA on January 2 and reap the gains of front loading all year. The downside is that while you avoid income tax on that money, you don’t avoid FICA tax. Is front loading going to net more than the FICA tax drag? Who knows? It depends on the market, so I don’t fault either method. But, I think the sure bet of avoiding FICA is the more conservative way to go.
There is also the “Last Month Rule.” This only applies your first year with an HSA. It allows you to get all $7,750 [2023] into your HSA even if your plan starts half way through the year. It says that if you have your HSA in December, and plan on having it all of the following year, you may top up to the $7,750 [2023] limit even though you didn’t have it all year. So if you were hired in November and don’t have enough paychecks to get up to your annual max, you could send in the balance to your HSA provider. I did this and recommend it because it maxes out your account the first year.
Future withdrawals
One way to make the HSA investment pay off is to save your EOB statements from your insurer. My HSA provider actually makes this easy, and I’ll bet yours will too. Scan and save receipts and EOB’s, then in retirement, pay yourself back for all those bills you cash flowed during your working years. Another sensible and easier option than scanning receipts is to simply not save receipts. Once in retirement, you and your spouse will have medical expenses. Between Medicare costs, insurance costs, and premiums paid, health insurance is a huge hole that people often forget to budget for in retirement. With a $500k HSA waiting in the wings, all those costs can be paid for from the HSA, freeing up the rest of your retirement budget for more fun things in life.
Is it right for you
Depending on your income and cash flow, the HSA as a Stealth IRA won’t be for everyone. There is also the added factor of dealing with scanning or saving receipts. I use the EOB .pdf from my insurance company for 99% of our expenses, and just save them on my computer and upload them to our HSA website. You can also simply plan to pay for retirement healthcare costs with it instead. There is certainly the risk of the market as well, but over a long period of time, I think it’s worth it. Some people would rather just pay out of the HSA and send their extra money to a brokerage account, even if that means paying extra taxes. There is a good article about the pros and cons of that here. In the end, the HSA is a fantastic tool either way.
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