Triple. Tax. Benefits. Nuff said?
According to a 2016 survey by AHIP, over 20 million Americans are currently enrolled in HSA plans.
Sounds like a lot, right?
We thought so, too, until we thought about that in percentage terms. According to the Federal Reserve Bank of St. Louis, there are greater than 205 million working-age people in the US (age 15-64). Yes, only 10% of potentially eligible Americans are currently contributing to an HSA.
So...why the low number?
We believe the reason for this is that the tremendous benefits of the HSA are simply not as well-publicized as their 401(k) or IRA brethren. And that's unfortunate because a vast amount of Americans are potentially leaving thousands on the table. As we discussed in a previous article, optimizing the HSA is one of the key ingredients to a potential early retirement:
One caveat before we discuss the stellar advantages the HSA offers: in order to be eligible to contribute to an HSA, the plan participant must be utilizing a High Deductible Health Plan (HDHP). This plan, as its name implies, offers lower monthly premiums in exchange for higher deductibles in case something goes awry. That's why it's so common to see younger folks contributing to these plans.
So what do we mean by Triple Tax Benefits?
- Contribution is Tax-Deductible
- Investment grows tax-free
- Withdrawals for qualified expenses are tax-free
The third bullet point is what really sets the HSA apart from other retirement vehicles. For example, the 401(k) and Traditional IRA are generally going to be pre-tax and allow for tax-deferred growth (same as the first two bullets). These same accounts in Roth form are already taxed when the contribution is made:
When the retiree withdraws funds from the aforementioned 401(k) or Traditional IRA, she/he pays tax as ordinary income. This is not the case with the HSA- as long as expenses are qualified, the individual does not have to pay tax.
This means that the money in the HSA is potentially never taxed! That can end up saving the account owner a substantial sum.
One little-known item about the HSA is what really supercharges the account for growth.
What is this key ingredient?
HSA funds can be used to pay a qualified medical expense at any time, as long as the expense was made after the account was opened.
Why is this a big deal?
This allows the account owner to pay for current medical expenses with their method of choice, such as a rewards credit card. Instead of withdrawing HSA funds, the money continues to grow tax-free. Then, when the saver is getting ready to retire, she/he can reimburse themselves for the amount spent. The only drawback of this method is that it requires diligent record keeping on behalf of the account owner. However, we think the pros far outweigh the cons for this.
Most providers have several options in which the saver can invest. Similar to 401(k) or IRA administrators, there are websites available that make it very easy to select the ideal investment for you.
How do I get started with my HSA?
First, ask your HR department about the High-Deductible Health Plan. Then, research what monthly premiums and deductibles come along with the plan. You may find that this plan isn't right for you and your family. We always recommend consulting with a licensed advisor or a person you trust in order to determine whether this makes sense for your scenario.
Once you know that the HDHP is right for you, research the HSA provider, investment options, and potential other company-provided benefits. You also may find that your employer is willing to kick in an additional amount each paycheck!
Triple Tax Benefits are the main reason the HSA shines as a retirement investment vehicle. There's no other account quite like it!
Like this article? Subscribe to receive more like it and share with your friends!
The author of this article is not a licensed professional. This article and all information presented is for informational purposes only and should not be taken as financial or legal advice. We recommend our readers to consult with a licensed professional in the appropriate field prior to making any investment decisions.