HSA Investing - Triple Tax Benefits!

Health Savings Accounts (HSAs) are amazing investment products to create wealth with the most tax benefits possible.

If you're thinking you knew what an HSA was and are now completely confused, let me explain...

An HSA, in its most basic form, is intended for medical expenses. When you contribute money to this account, you reduce your taxable income for THAT YEAR. Thus, you save money on taxes immediately.

These are very different than Flexible Spending Accounts (FSAs), so don't get them confused. 

How do Health Savings Accounts work?

Here is the full scoop:
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1. MONEY ROLLS OVER EACH YEAR
-Unlike an FSA, the money rolls over if unused in that year. It's not a "use it or lose it" system. 

2. CONTRIBUTIONS ARE PRE TAX
- Contributions are pre tax if you contribute through an employer. If you purchased your own plan, they are tax deductible. 

3. GROWTH IS TAX FREE
- Probably the best feature!

4. MONEY CAN BE USED FOR MEDICAL EXPENSES AT ANY TIME, TAX FREE
- Just make sure you keep qualifying medical receipts. This essentially gives you a separate medical emergency fund in addition to your regular emergency fund. 

5. MONEY CAN BE USED AFTER 65 FOR ANY REASON PENALTY FREE
- However, you will still pay taxes if the money is used for a non-medical expense. Still, it gives you flexibility in your spending if you need to use this money.

6. YOU HAVE TO BE ENROLLED IN A HIGH DEDUCTIBLE HEALTH INSURANCE PLAN TO QUALIFY (AND THERE IS AN ANNUAL CAP TO CONTRIBUTIONS)
- The max contribution amount changes each year.

How can you use an HSA to invest?

Normally, HSA money is in a checking style account. It's essentially cash, waiting for you to spend it. Even though you're getting tax free growth, there isn't much growth to speak of. 

Instead, you can INVEST the money within your HSA account into low cost index funds. This means you wouldn't spend the money on medical bills now. Instead, pay for all medical bills as you would any other bill and keep your medical receipts.

Life hack: Keeping your receipts is hugely important, as it gives you the opportunity to reimburse yourself tax and penalty free at any time in the future!

Allow your investments to grow TAX FREE. Use the account as another retirement savings account with incredible tax benefits. If you end up needing the money sooner, you can withdrawal money out to reimburse yourself for any qualifying medical expense you have a receipt for.  ​

It's important to note that you should only invest your HSA money if you can cashflow small medical expenses in your monthly budget, and have an emergency fund in place to cover your deductible. 

Triple Tax Benefits

You end up getting triple tax benefits when you invest these funds:

1) Pre-tax contributions

2) Tax free growth

3) Tax free withdrawals in retirement for qualifying medical expenses

Worried you won't need the money for healthcare expenses in retirement? 2022 data from Fidelity's Retiree Healthcare Cost Estimate showed the average retiree couple age 65 should plan on over $300,000 in healthcare costs in retirement.