A Health Savings Account (HSA) is the most underrated little planning tool with big upside. The first, second, and third reasons are that an HSA is the only triple-tax-free account in the investing world.
Health Savings Accounts -- A Triple-Tax-Free Way to Invest For & WITH Healthcare!
Deductible contributions to your HSA are tax-free.
Investments inside your HSA grow tax-free.
Withdrawals from your HSA are tax-free.
The only requirement is that you must have a high-deductible health insurance plan. These plans are becoming increasingly common and available whether you want one or not.
How to Think About HSA Tax Benefits
I underestimated the HSA’s potential at first, and I own an investment firm, so don’t feel bad if you haven’t considered the tax benefits of an HSA plan before.
The last thing I wanted was another low-interest rate bank savings account to keep track of deposits and expenses. I have five kids still at home, so I’m actually the worst kind of candidate for a high deductible plan because I know we are spending money on a lot of doctors, even when we are blessed with great health.
I had been thinking about it wrong. Rather than use the HSA for current medical expenses, I am not going to spend a dollar from it, because it is the most powerful investment account.
If you need to spend from an HSA now, there is nothing wrong with that. But, it can answer what all my healthiest retiring-early clients fear the most -- unknown medical expenses way down the road.
Fidelity conducts an annual health care study for an average 65-year old couple retiring. The question they ask is: what will their medical expenses be for the remainder of their lives? The answer is currently $285,000.
I’m not a big fan of surveys, and none of our clients sign up for average retirements -- they deserve something much better. But, I agree that the direction of the numbers is higher, and larger than most think. Rising healthcare costs are more the doubling the rate of inflation.
“To know the road ahead ask those coming back.” Chinese Proverb
We asked our clients with the most battle-tested Financial Freedom Plans and multiple annual income streams -- which allow them to do whatever they wish -- what is the only concern you have left? “Unexpected healthcare expenses” is almost always the answer.
If you are a net saver now, qualify for an HSA, and have many working years ahead before even considering retirement, the triple tax-free math is particularly appealing.
You can contribute anything you want up to a limit of $3,550 for individuals and $7,100 for families, and an extra $1,000 if 55+ age in the year 2020. Those numbers have been creeping higher each year.
Or, if you are like me and might not ever want to retire because you work on a craft you love (the best financial plan of all!), an HSA may be even more helpful. I want to afford better healthcare. I know it will cost more. The only way I know how to outpace inflation is invest in businesses getting paid more for better results.
Healthcare Development is Outpacing Healthcare Costs
The developments in health care are far more astounding than the rising costs.
Cancer death rates have been on a steady decline, with medical breakthroughs pointing to more. That good news is accelerating, as we just witnessed the largest annual drop ever recorded.
Some of the smartest guys and gals in any room are Andreessen Horowitz venture capitalists, who are better at predicting the future than any I know.
One of their aces, Scott Kupor, when asked about the “next next thing” they’re most optimistic about, said: “Life science and biology is where computer science was in the late ‘60s, early ‘70s.”
Those health costs inflation rates look a little different when compared to health care stocks over the same time.
The real deal-maker on the HSA for me was when I could move cash earning nothing from one of the only little banks in the country specializing in HSAs to the large online custodians like Fidelity, Ameritrade, and Schwab to invest in stocks. Then, trading commissions went away, making small deposits and share purchases add up even faster.
Is Treating My HSA As An Investment Account Right For Me?
Turning your HSA into a tax and investment strategy is not for everyone. Even among the very few families that have an HSA, Fidelity shows that more than 90% are in cash and spend it down each year, which is fine. That’s what a savings account is there for, and they are getting the first tax break (deductible contributions).
There are many others that want no part of the risk that comes with owning stocks, which is also fine, as there are plenty of low or no-risk savings options in an HSA.
I simply like to share what I am thinking, trying, and doing (right and wrong) for my own family in case it could help another, especially if it represents a different way of attacking a problem.
If you are worried about rising health costs (or excited about improving health care), you could own shares of Healthcare stocks inside an HSA and potentially benefit from both -- in a triple-tax free account.
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