I love my Health Savings Account. I get the ultimate in tax-advantaged investing.
There are three main, unavoidable, forces eroding your wealth over time:
- Taxes
- Inflation
- Fees
You can't stop these forces from reducing your real investment returns over time, but you can minimize them. There are ways to reduce your exposure to inflation risk. With a little looking around, you can make sure you aren't throwing away as much money with investing fees.
With a little tax planning, you can reduce the amount that the government takes. One of the great tools of long-term investing is the tax-advantaged account. Most of these accounts are related directly to retirement. IRAs and 401(k)s immediately come to mind when you think of tax-advantaged accounts. You might even think about the 529, which also comes with certain tax benefits for the beneficiary.
What you may not be taking advantage of, though, is the Health Savings Account. This is another tax-advantaged investment account that can work in your favor if you qualify.
How the Health Savings Account Works
As with most other tax-advantaged investment accounts, there are eligibility requirements for contributing to a Health Savings Account (HSA). You have to purchase a high deductible health insurance plan, and you have to adhere to contribution limits. But if you qualify for an HSA, it can be a great way to enjoy some tax benefits.
The HSA is the ultimate tax-advantaged investment account because you can get a tax deduction for your contributions — and the money grows tax-free as long as you use it for qualified medical expenses. If you decide not to use the money in your HSA for qualified expenses, it operates exactly like a Traditional IRA. (10% penalty for withdrawal under age 59.5, pay income taxes on the withdrawal.)
And, like other tax-advantaged retirement accounts, you can hold various investments in your HSA. It's possible to hold stocks and bonds in your HSA, as well as cash. Many HSAs are, unfortunately, run similarly to savings accounts, which means low yields. It also means you might have to look a little harder to open an HSA with a custodian/trustee that will allow stocks and bonds. Vanguard offers some tips for holding its stock funds in an HSA, and you can ask your bank or credit union about the possibilities.
Because the HSA is an investment account, realize that it is not FDIC (or NCUA) insured. You can lose your money — especially if you decide to invest in stocks or stock funds. Many people like the idea of investing in TIPS with their HSA money since it can reduce exposure to inflation while offering a fairly “safe” investment. What you decide is up to you.
With the HSA, you have some options. I am trying not to use my HSA money right now. I contribute to the HSA regularly, but I try to make my health care payments out of pocket. This is fairly easy right now since we rarely have health care needs. We have yet to come close to reaching our deductible (which is one of the reasons we switched to a much-lower-cost HDHP in the first place). In the future, I'll (hopefully) have some money built up in the HSA that I can use toward health expenses in retirement — without paying taxes on the withdrawals.
And, of course, if I need to withdraw money during retirement, I'll have to pay the income tax on it. But I plan to try and avoid that. With health care costs rising, I like the idea of having the HSA available to provide a tax-free way to pay.
What about Obamacare and HSAs?
I'm not a huge fan of the PPACA (but I don't think it's the worst thing ever; I'm pretty lukewarm about it), and I'm a little wary of what's next for my beloved HSA once the law goes into full effect. In some areas, my health care costs are going to rise at a slower rate than before, due in large part to PPACA (it's a very personal thing, the way the law affects you depending on your current situation). However, there are concerns about what's next for HSAs.
Thanks to the actuarial requirements associated with the PPACA, and their impacts on high deductible insurance plans, there are some plans that might increase in price — or disappear. It's a thorny issue that not too many people seemed worried about right now. But there are some of us who are waiting to see how it all plays out, and crossing our fingers.
In the end, though, if you qualify for a Health Savings Account, it can make sense invest in one. You get a tax deduction now, and as long as you use the money for qualified expenses, it grows tax-free. It's the only tax-advantaged account that offers both the deduction — and the tax-free growth. That's a valuable thing.
