HSA Strategies for Investors
What is an HSA?
Three little letters, HSA, but yet they can be a powerful tool for your financial success. For starters, an HSA (Health Savings Account) is a tool available for those that have high deductible health care accounts. As a quick refresher, they allow you to put money away pre-tax, which can be used tax-free, for medical expenses. They don’t have to be used at any given time, so if you wish you can let your dollars accumulate for as long as you want.
Now that you have the cliff notes on these wonderful accounts let’s talk about my top recommendations/strategies for them.
Max Out Your HSA
For starters, you should always max them out each year if you are able. This way you can benefit from the triple tax advantage you get (pre-tax, tax-free growth, and comes out tax-free as well). There is literally no other vehicle I am aware of that provides you the same benefit. The limit in 2022 is $3,700 for an individual or $7,400 for a family. If you are 55 and older you can contribute an additional $1,000.
HSA Investment Strategies
Invest as much as you can. As your dollars begin to accumulate in your HSA most programs have an investment feature. Go to bullet one if you need a refresher, but remember these dollars grow completely tax-free. Thus, invest as much of the balance as possible to take benefit from tax-free growth. My trick is to leave my deductible amount in cash and invest everything else.
Save the receipts. Now a neat little benefit of an HSA is that the requirement to pull the funds out completely tax-free is all you need is a medical bill or receipt that matches up with the withdrawn amount. Furthermore, there is no time limit to when you have to pull these funds out, meaning the expense can happen this year yet the withdrawal can happen 20 years from now.
How can this be a benefit? Well, you could invest your HSA dollars for the next 20-30 years letting them compound tax-free. Then in retirement pull as much as you want out tax-free to pay for retirement expenses. Again, all you need to do is have the records that you have equal expenses as withdrawals over the past few decades.
Employer Matching an HSA
Employer match. Not everyone is able to contribute the maximum to their HSA, and that is simply O.K. That said if your employer offers any sort of match, make sure you 100% take advantage of contributing to at least that level. A special reminder is that unlike a 401(k) the employer match is considered part of your total maximum you can contribute into a year. For example, if this year the maximum is $7,400 and your employer matches or contributes $1,400, the most you personally can deduct is $6,000.
Using HSA Funds for Medicare
Use your funds for Medicare Part B & D. Even if you don’t have many medical expenses through the years, you are almost certainly going to have out-of-pocket expenses for Medicare Part B & D. You can use your accrued dollars to pay for these premiums once you hit 65. That said you can not use them to pay for supplemental Medigap insurance.
HSA for Estate Planning
Estate planning benefits of a Health Savings Account. If you are married and have your spouse named as the beneficiary you’ll benefit from the fact that if you predecease them these funds will avoid probate, and be transitioned into their name so they can use it with all the same benefits you personally had.
RMD for HSA
No Required Minimum Distributions. Your IRA’s or 401(k)’s at 72 years old are subject to an RMD, meaning you must take funds out. The nice thing about an HSA is at no time does the government force funds out. Important to note is you definitely want to use these funds during your lifetime (or spouses) since anyone else will lose the benefits once inherited.
Big Expenses, and Big Benefit
Fidelity estimates that retirement medical expenses can average around $375,000 per person. That is a huge amount of expense that most of us are forced to utilize our pre-tax retirement savings for. If planned properly your HSA can be a major retirement strategy to help you live your best retirement life.
Hope you enjoyed these nuggets and as always stay wealthy, healthy, and happy.
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