Micro Blog #29: Least Known Benefits of a Health Savings Account (HSA)

In the US, Health Savings Account (HSA) is a great way to save for healthcare tax-free. However, besides the obvious tax-advantage benefit, there are several other least known benefits of having an HSA account. Some of these least known benefits can easily enhance your long-term tax-free income for meeting future healthcare costs and even general expenses in retirement.


HSA Funds Can Be Used For Any Purpose After age 65

HSA is more than just a Health Saving account and just as a traditional 401k/403b or an IRA account, it can be used as a retirement savings account. This is because of its pre-tax contribution benefit and the ability to withdraw funds for any purpose without penalty after age 65 (ordinary taxes apply for non-medical withdrawals).

The current year pre-tax contribution limit on HSA account is set at $6900 for a family and $3450 for an individual. This contribution limit is independent of any other retirement account you may be contributing to and normally increases each year to keep up with inflation.

Invest in HSA and Grow Dividend Income Tax-Free

HSA funds can be used to invest in wide range of securities, including mutual funds, stocks, bonds and more. I think this is a very powerful benefit of HSA that many people overlook or don't take advantage of. Let me give you an example:

In 2011, when I first started contributing into a HSA account, the HSA contribution limit for a family was $6150. Since then, it has been increasing almost every year and the current contribution limit is $6900.

Now, let's say you start to contribute monthly into HSA this year and you contribute the same amount for the next 5 year, and you also invest the funds into a S&P 500 fund that earns a very conservative 7% annual return. Here is what your HSA value would be after 5 years and not counting dividends (which you would also earn on top of capital growth):

Source: https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

If you could only contribute half of the HSA max contribution of $3450 (annually) or $287.50 (monthly) for 5 years and invest it in the stock market (assuming a conservative 7% annual return), you can still amass a nice sum of money tax-free at the end of the 5 years:

Source: https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

Now, imagine earning interest or dividend income from the HSA investments and using those dividends to pay for out-of-pocket healthcare expenses such as health insurance deductibles.

Just to give you my own example, I contributed into my HSA for only 4.5 years (2011 - mid 2016) while investing all funds in the stock market and reinvesting dividends. As a result, now my dividends from HSA alone can cover about 80% of our health insurance deductible, and this is not including Mrs. ATM's HSA account which is invested in dividend paying ETFs.

Our goal is to reach 100% coverage of our family deductible in the next 2-3 years using my HSA alone, while using Mrs. ATM's HSA to pay for any additional out-of-pocket medical expenses in the future.

HSA can cover many health expenses that aren't typically covered by health insurance plans.

In addition to a wide range of IRS-qualified medical expenses, a HSA account can cover medical expenses that aren't typically covered by health insurance plans such as deductibles, co-insurance, prescriptions, dental and vision care, and more. So think of that expensive dental work that your dental insurance didn't cover or that prescription reading or sun glasses that you had to pay out-of-pocket for. All that can be covered using tax-free dollars from HSA account.

For a complete list of which expenses are covered by a HSA, visit  hsabank.com/IRSQualifiedExpenses

HSA can be used to pay for previous year expenses

Yes, you read it right. You can not only pay for your current and future medical expenses using HSA funds, but you can also reimburse yourself tax-free for past medical expenses as long as the expenses incurred after your HSA was established. So keep those medical expense receipts in a safe place as you can use them in the future for HSA reimbursement.

This is my favorite benefit of HSA as it would allow us to tap into our HSA funds as an additional tax-free retirement income by withdrawing against past medical expenses. There is also no limit to how much one can withdraw tax-free for past medical expenses, as long as expenses incurred after HSA was established. How great is that?

HSA Funds are Never Lost

Regardless of your health insurance or employment status, your HSA funds are never lost. They are yours to keep for as long as you want and you always have access to your funds to pay for medical expenses or even as an additional retirement account.

Conclusion

If you are not contributing or investing in HSA, you are missing out on a great way to self-subsidize your health insurance expenses tax-free, not to mention potential for having an additional retirement account.

Disclaimer: As always do your own due-diligence before investing. HSA information presented in this article is accurate to the best of my knowledge and understanding at the time of writing this article. Please do your own research on HSA benefits and IRS requirements before making any decisions to contribute or invest in HSA.

Comments

  1. I'm a big fan of HSAs for all the reasons you highlight Mr. ATM. My wife and I are currently in a high deductible health plan and we both have HSA accounts. I really love the tax benefits. Tom

    ReplyDelete
    Replies
    1. That's awesome Tom and hope you are investing and earning dividends in those accounts as well.

      Delete
  2. As you know, I am a big fan of the HSA. It is still fairly new due to my insurance changing, but it has tons of potential in the long run as you mentioned. I also want to note that you can only get an HSA if you have a High Deductible Health Plan (HDHP). And I believe you can't be on Medicare or another government type insurance. The tax benefits alone are a no brainer to get one. But even better with all the other reasons you mentioned. Thanks for sharing.

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    Replies
    1. Yes, one must be enrolled in a HDHP insurance plan to be eligible to open a new HSA account. But once opened, you don't lose it if you dis-enroll from HDHP or enroll in Medicare.

      Also per my understanding, another benefit of HSA is that you can use it to pay for Medicare insurance premiums as qualified medical expenses (excluding Medigap).

      Delete
  3. Very good information. HSA is a good tool. If you don't use it, it's still your money, and you won't lose it. As you mentioned, after the age 65, you can use it for non-medical things, and just pay the regular income tax without any penalty. That's good to know. Thanks.

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    Replies
    1. Thanks for stopping-by Helen. Yes, HSA is my favorite of retirement or tax-advantaged account. They don't call it "Never pay tax" account for nothing. But sadly most people don't realize its long-term benefits besides just paying for current medical expenses.

      Delete
  4. Mr ATM, thank you for this. We are not currently participating and to be honest, I never realized some of the additional benefits. Being able to pay for past medical expenses is pretty remarkable. We don't doctor much yet but for the future, yeahhhhh this is something we need to start contributing to.

    Thank you for this valuable post my friend.

    ReplyDelete
    Replies
    1. Yes, I would strongly encourage you guys to start contributing into HSA, especially since you are still young and don't use doctor much. This would be the best time to start building your HSA fund. You would be able to safe a lot for future medical expenses while lowering your taxes. HSA is also nicked-named "Never Pay Tax" account because of the benefits I mentioned.

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  5. I'm a huge fan of HSAs and if offered the chance would invest. I'm currently able to take advantage of FSAs but I really wish that I had the ability for an HSA :)

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    Replies
    1. I’m wondering if there is way to do both? You can always open a HSA on your own if you have a HDHP plan.

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  6. I love my HSA and am making sure I maximize my contribution annually. Luckily mine has an investment option as well, so I can invest all dollars over $1,000. Thanks for the refresher about the benefits of the account.

    Bert

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    Replies
    1. That's awesome and I'm glad you are maxing out HSA contributions and taking advantage of investment options. Thanks for stopping-by.

      Delete
  7. Unfortunately we don't have anything like this her in Holland.

    But your article clearly show why one would want to use it!

    ReplyDelete
    Replies
    1. But fortunately for you Mr. Robot, nobody goes bankrupt in Holland from getting sick. So, maybe you don't really need a HSA as I'm assuming the healthcare is very affordable in Holland and most of Europe.

      Delete

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