Takeaways:
- HSA is More Than Just for Health Expenses
It’s a savings account that can also be used as an investment vehicle for retirement, similar to a 401k. After age 65, you can spend HSA funds on anything!- HSA Offers Triple Tax Benefits
You don’t pay taxes when you contribute, when the money grows, or when you withdraw for medical expenses—making it a powerful tool for tax-free savings.- To Use HSA, You Need an HDHP
To be eligible for an HSA, you must have a high-deductible health plan (HDHP), and don’t forget to invest the funds so they grow, rather than letting them sit in cash!
Do you know what HSA is? Do you wonder what tax advantages HSA offers? Who and how can you eligible for HSA?
If you have these questions, then this post is for you.
What is HSA?
HSA is Health Savings Account. As you can see from its name, HSA relates to health expenses and this account is meant for savings. I like the definition from HealthCare.gov.
- A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses.
Let’s break down this concept one by one.
In the Beginner #1 post, I mentioned voluntary paycheck deductions. HSA falls into this category.
Additional reading:
How much should I save, and how (Part 1): Saving or investing?
Since HSA is a savings account, the funds are meant to save for the long term, planning for health expenses in the future.
If you are a healthy person like me, you may think it is not applied to me. Why do I have to prepare funds for health expenses 20 years from now? Too long to think about it!
HSA is an investment account for retirement.
🤯Yes! About 90% of people don’t know they can invest with HSA (source). This is how it is relevant and important for people who don’t anticipate health expenses in the near future. HSA is an investment vehicle that you can build wealth for retirement, like 401k. I will explain why in the following section.
HSA funds can be used for qualified medical expenses (at any time) and for anything* (after age 65).
You can spend HSA funds for anything after age 65; therefore, HSA becomes a savings account for retirement because of this rule.
- Once you turn 65, you can use the money in your HSA for anything you want. If you don’t use it for qualified medical expenses, it counts as income when you file your taxes.
Meanwhile, as long as the expenses are qualified medical expenses, according to the IRS list, you can use it for tax free, at any time in your life.
HSA is tax free. HSA triple tax benefits.
HSA is tax free when you spend money for qualified medical expenses at any time. Additionally, you are still eligible for tax advantage when you spend money for anything else after age 65, just like your traditional 401k. This is how the triple tax benefits work.
Medical expenses (any time) | Anything else (after age 65) | |
Money In | 🚫 | 🚫 |
Money Growth | 🚫 | 🚫 |
Money Out | 🚫 | ✅ |
- You don’t need to pay social security or medicare tax when you put money in.
- You don’t need to pay capital gain when money grows.
- You don’t need to pay income tax when you take money out.
HSA is a worthwhile retirement savings option for people without (immediate) medical expense needs.
How does HSA work?
If you are still reading it, I believe you are sold.😆
If you think about using HSA as an investment saving options, this is how to get started:
- Sign up for a high-deductible health plan (HDHP) to become eligible for a HSA.
- Set up a HSA account, either through your employer or by yourself.
- Set up your distribution with your employer. Then, money will be put in your HSA account when your paycheck is cut.
- ⚠️ Set up HSA funds for investment. (If you don’t do it, the funds typically will sit in as cash. The fund is not going to grow until it is invested.)
- Understand the annual contribution limits by the IRS, and monitor it annually (Just like your 401k).