A Health Savings Account (or HSA) is a money-saving stealth ninja. When it comes to dodging taxes legally and racking up sweet investment returns, it almost can’t be beat. So if you’re not using, or are underfunding, an HSA, you’re missing out.
Today we’re looking at what these special accounts actually are and the unique ways they can turbocharge your journey to Financial Freedom.
What is a Health Savings Account anyway?
An HSA is a specialized savings account offered through your employer and used to cover qualifying medical expenses. The majority of U.S. businesses do give employees an HSA option, provided that those employees sign on for a high-deductible health plan.
If you elect to open an HSA, you can contribute a portion of each paycheck — before taxes — directly into your HSA. And, any qualifying medical expenses that you (or your family members) incur once the account is open can be paid from funds in the HSA.
Plus, your HSA is portable. So, if you ever leave your job, you get to keep the account open to access the funds.
1. An HSA can save you big money on medical costs
The most obvious benefit of an HSA is the potentially vast savings on pricey medical costs. Without an HSA, you’d likely shell out for deductibles, copays, coinsurance and costs not covered by insurance with post-tax money pulled out of your regular banking account. But, an HSA allows you to use pre-tax funds to cover those expenses instead.
Even better? Many businesses incentivize employees to use Health Savings Accounts by making a no-strings-attached company contribution directly to your HSA. These contributions are completely free (and tax-free!) money that can amount to several hundred dollars or even more than a thousand dollars for you to spend on medical costs every single year.
2. An HSA allows you to hold on to money for the long run
Don’t confuse a Flexible Spending Account (or FSA) with a Health Savings Account. There’s a key different between FSAs and HSAs. An FSA actually comes with a use-it-or-lose-it provision. You forfeit any funds you contribute during the calendar year that you don’t actually use during that year. But funds in an HSA don’t have an expiration date!
Here’s where many HSA owners make a mistake. They try to anticipate their medical expenses for the upcoming calendar year and elect to contribute only that much to their HSA. But many financial experts recommend you seriously consider contributing up to the maximum allowed each year. There’s no penalty for shoving extra cash into your HSA, but there are some serious benefits.
3. An HSA reduces your taxable income
A nice side effect of using an HSA is that you actually wind up with a lower taxable income. Think about it.
Suppose you have a high-deductible family medical plan. In 2018, you can contribute up to $6900 to an HSA and use that to pay your family’s medical costs. And, since those contributions are made with tax-free dollars, you’ll subtract $6900 off your total income at tax time.
As a result, you avoid paying taxes on nearly $7000 of income. And you might even wind up in a lower tax bracket.
4. An HSA can be a viable part of your Growth Engine
By now, you know that money invested wisely accelerates your Freedom Journey in a way that funds stagnating in a savings account never can.
But did you know that your HSA funds don’t need to stay in a bank account while you’re waiting to use them? In fact, you can elect to invest those funds into a variety of investments that allow your contributions to grow.
So you don’t actually have to choose between the cost savings of an HSA and the growth possibilities of investments in a traditional brokerage account. You can have it all when you opt to invest your HSA funds.
Setting up your HSA investments is typically a straightforward automation. Simply log in to your Health Savings Account online, choose your investments, specify your desired portfolio distribution. Then click the options that allow your contributions (and dividends) to be invested automatically according to your specifications.
5. An HSA can triple your tax savings
Unlike just about any other financial vehicle, HSAs offer truly spectacular savings when it comes to your taxes.
First, you get to enjoy the benefit of completely tax-free contributions to an HSA. Second, you get to withdraw your money completely tax-free when you use the funds to pay for qualifying medical expenses. And third, you reap the rewards of 100% tax-free growth on your HSA investments.
So, if you contribute $5000 this year to your HSA, you’ll pay nothing in taxes on that sum. You can withdraw it any time to pay for your medical expenses without any taxation. And, if you allow your account to grow for years or even decades, the amount you’re able to withdraw tax-free can grow by huge quantities.
If you’re not using — or are under-using — a Health Savings Account, it’s time to assess your approach to this special savings account. So much more than a way to pay for this year’s medical costs, an HSA can be a massive money-saver over the years and a true asset to your Freedom Generator.
image credit: Bigstock/TierneyMJ
Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.