Health Savings Account: Your Most Powerful Account

In building your wealth as you head toward retirement, it is critical to do the big things right: save and invest systematically, don’t spend more than you make, don’t take too much risk with your investments, don’t take on too much debt, etc.

But there are also a slew of smaller things that investors can do to further grow their portfolios and strengthen their financial foundation.

In particular, a person who has a Health Savings Account (HSA) should understand that, in fact, their HSA is probably their most powerful investment account.  (HSAs are used in conjunction with high-deductible healthcare plans to help individuals pay out-of-pocket healthcare expenses.)  Most people who have HSAs use the money in them for current-year medical expenses.  However, in my view people with HSAs should make the maximum contribution each year—then cover their medical expenses with other funds.  The HSA assets should be invested for the distant future.  Here’s why:

Health Savings Accounts are potentially your most powerful account because they pack a triple-whammy tax-savings punch. 

  • First, contributions to HSAs are tax deductible. 
  • Second, your HSA assets grow tax-free.  
  • And third, distributions that are used for qualified medical expenses are also tax-free.

Thus, by contributing each year you will lower your tax bill and build, tax-free, an account that you can tap tax-free for medical expenses during retirement.  These tax attributes of HSA accounts put them at the top of the heap of retirement savings vehicles, ahead of Roth IRAs (where funds are taxed before they are contributed) and IRAs and 401(k)s (where funds are taxed on the way out).

However, there are a few attributes of HSAs that slightly dim their allure as savings vehicles.  First, withdrawals are only tax-free is used for medical expenses.  Second, many HSA custodians levy fees on transactions, so costs can add up.  Third, the penalty for withdrawals not used for healthcare expenses prior to age 65 is 20%--versus a 10% penalty on IRA withdrawals prior to retirement.

As always, when it comes to making financial moves, what’s right for one person’s situation may not be right for another’s.  However, using an HSA as a savings vehicle, given its trio of tax advantages, is certainly worth considering. 

To learn more about how we manage client portfolios, please visit us our Portfolios page.

Disclosure: This article is for informational purposes only and is not tax advice. For tax advice individuals should consult their CPA.

** Photo credit: 401(K) 2013 via / CC BY-SA

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