The term HSA is short for ‘health saving account‘. An HSA is an amazing tax-advantaged account! Whenever we hear or see the word tax-advantaged, we pay special attention to learning all we can about it.
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My wife and I have separate health insurance. She and our kids are under her company’s PPO (preferred provider organization) plan.
I have an HDHP which is a high-deductible health plan. With an HDHP, I have the option to open an HSA account.
My company matches part of the money that I put into the HSA!
We had our first baby in Oct 2020 and our second is due at the end of February 2021. I will use part of our HAS fund for eligible expenses from the upcoming hospital bill.
We use the remaining amount to INVEST!
You may use your HSA funds on both your spouse and tax dependents. For example, you can use it for eligible medical expenses for your children (not adult children, haha).
So even if you’re like us and your spouse and kids are not on an HDHP plan, don’t fear! They can still use the funds from your HSA for eligible medical expenses.
I max out my HSA every year!
An HSA has triple tax advantages and can also be considered a retirement account when you are 65.
It is a fantastic FIRE friend to have on our fire journey.
I will first explain an HSA’s Triple tax benefits in this article. Then I will share how to invest in an HSA for retirement!
Table of Contents
What exactly is an HSA?
A health savings account is a tax-advantaged savings account. It is available for those who have an HDHP (High Deductible Health Plan).
An HSA allows you to deposit pre-tax funds each year. You can then use those funds to pay for qualified medical expenses.
Each company may have a different HSA contribution limit that must be reached before being able to use the funds to invest.
For my HSA, the requirement is to have a minimum of $1000 saved up before being able to invest in the stock market.
If you have an HDHP in 2022, you can contribute up to $3,650 for self-only coverage and up to $7,300 for family coverage (different HDHP plans).
HSA funds roll over year to year if you don’t spend them.
What are the HSA Triple Tax Benefits?
- Contributions Are Tax-Free
- Withdrawals for Qualified Medical Expenses are Tax-Free
- Investment Growth is Tax-Free
Triple tax benefits can be difficult to come by. That’s why an HSA is so amazing.
Here are more details on each of the three tax benefits.
Contributions are tax-free
Taxes do not need to be paid on the money you deposit into your Health Savings Account!
In general, there are two ways you can put money into an HSA. First, your HSA contributions can come straight out of your paycheck through a pretax payroll deduction.
Second, if you choose to make contributions with after-tax dollars on your own, you can claim them as tax deductions when you do your income taxes return.
There is no “use or lose” rule like an FSA (Flexible Spending Account). The money saved up in an HSA will roll over year after year.
Withdrawals for Qualified Medical Expenses are Tax-Free
Not only can you contribute money tax-free to an HSA, but also money taken out from your HSA follows the same principle!
As long as you use your HSA money to pay for qualified medical expenses, you won’t need to pay any taxes or penalties on the withdrawal.
Investment Growth is Tax-Free
As mentioned previously, once your account hits a required minimum balance, you can start investing the money you have in your HSA.
For my HSA, the requirement is to have a $1000 minimum saved up first.
Choosing to invest in your HSA has the advantages of tax-free growth and makes a nice addition to our retirement portfolio.
Our HSA is a good FIRE friend on our fire journey!
How an HSA Works as a Retirement Account
BEFORE age 65: withdrawals for non-qualified medical expenses will have a penalty and income tax that must be paid. Usually, the penalty is 20%, ouch!
AFTER age 65: withdrawals from your HSA may be used for anything you’d like without paying the 20% penalty fee, but you’ll still have to pay income tax on the withdrawals. It works similarly to a Traditional IRA.
Related Content: Roth IRA vs Traditional IRA
Now you know the HSA’s Triple tax benefits and how it can be used as a tax advantage retirement account! We are grateful we didn’t miss such a good triple tax advantage account.
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
