How Does a Health Savings Account Work?

Everyone hates taxes.  If you don't, then don't tell anyone.  They'll just think you're weird. 

And yet you probably don't take advantage of the ONLY way to (legally) never, ever pay taxes on the money you make.  No income taxes.  No capital gains taxes.   Uncle Sam doesn't get a single, red cent.

Do I have your attention?

Ever heard of a Health Savings Account? 

No?  That might be because they're relatively new.  Dubya started them back in 2003. 

Here's how they work.  You put in pre-tax money (just like your 401k).  Invest the money.  Then take the money out tax-free in retirement (like a Roth IRA). 

Too good to be true, right?  Well, yes and no.   Here's the not-so-fine print:

  1. Withdrawals are only tax-free if you take the money out to pay for qualified medical expenses

  2. You can only open and put money into an HSA if you are enrolled in a high-deductible healthcare plan

So what's a high deductible healthcare plan?  It's just like a regular plan except the deductibles are bigger (it's all in the name, innit?).   The minimum annual deductible if it's just you is $1300, and if it's you and your family it's $2600 annually. 

Now the real catch is that for this to work as the world's best retirement savings vehicle, you have to use it as a retirement account.   To be clear, this is not what it was originally intended for.  It was created to pay for CURRENT medical expenses.  But because the money rolls over year-after-year AND you can invest it, some very smart financial planners realized it could be an extremely valuable retirement asset. (I like to think I'm smart financial planner, but I can't claim credit for this one.) 

For this to work, you have to pay for your medical expenses TODAY out-of-pocket and not from your HSA.  So you have to be able to afford to pay your annual medical costs from your checking account.  And be warned - the medical costs will be more than you're used to, especially if you go to the doctor a lot. 

The most you can put in an HSA each year is $3,350 if your single, or $6,750 if you’re married.  (And if you're over 55, you can save an extra $1,000 on top of that.)

That might not sound like much, but it adds up over time.

If you save $6,750 each year for 20 years in an HSA and it grows at 8% per year, you'll have $309,000 at the end (you would have put in only $135,000).

If you use the same numbers, but in a regular taxable brokerage account, you would only end up with $170,000 after you pay all the taxes.  

I don't know about you, but I'd rather have $310k than $170k. 

All of this being said, whether an HSA is right for you depends on your financial situation.  This is NOT A RECOMMENDATION because I know nothing about your situation and therefore can't possibly know if it makes sense for you and your family.  

But I DO recommend you look into it.  Talk to your financial planner to determine if it's right for you.