Are Health Savings Accounts the most underutilized tool for the average investor?

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Nick Foy, CFP®

Over the past couple of years we’ve been touting the benefit of the Health Savings Account (HSA) to our clients, but it’s worth noting that HSAs are unique in the world of personal finance:

From a tax perspective, HSAs are more beneficial than any other type of account. Contributions go in pre-tax, growth is tax-deferred, and everything comes out tax-free assuming you use the money withdrawn to cover a qualified medical expense. This triple tax advantage doesn’t exist anywhere else.

What qualifies? The list is exhaustive, and covers everything from acupuncture to x-ray services.

We’ve noticed, though, that most investors don’t use them well, and many don’t even know where their HSA dollars end up after they are deducted from their paycheck. If you’re in that boat, you might be missing out on one of the best savings vehicles available.

Updated Contribution Limits for 2018

Just to complicate things, the IRS twice updated the maximum amount that can be contributed to an HSA for 2018, but families with High-Deductible Health Plans (HDHP) can contribute up to $6,900 for the year. People on an individual plan can contribute $3,450.

The Highest and Best Use for the HSA

Once you’ve made the contribution, now comes the fun part: Don’t spend money from the HSA. Hold off as long as you can, and instead use money from regular cash flow or savings to fund your medical expenses.

Avoiding HSA withdrawals allows the account to grow tax-free for longer, potentially enabling you to build up a healthcare nest egg.

Health care costs have been (and will probably continue to be) one of the most difficult expenses for us to estimate, especially decades in the future. Having a significant sum of health care specific dollars can potentially allow you to avoid purchasing expensive long-term care insurance, which may or may not be useful for you.

Then, instead of keeping the HSA in a low-yield account (which is where your deposits probably end up), invest the money with an eye toward long-term growth. The HSA then becomes a tool allowing you to offset the cost of future health care in a tax-free way.

A six-figure HSA can be an incredibly powerful tool to offset the risks of rising healthcare costs, and utilizing it in the right way can help protect against unexpected healthcare events.


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