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Updated October 2, 2023

Health Savings Accounts: The MVP of Your Retirement Investing Plan

Health Savings Accounts: The MVP of Your Retirement Investing Plan

Health Savings Accounts: The MVP of Your Retirement Investing Plan

Mike Zaccardi, CFA, CMT

Mike Zaccardi, CFA, CMT

Personal Finance

What if I told you...there is an easy way to lower your health care costs by 10%, 20%, maybe even 30%? Are you in? It’s super easy and you can make it a routine, just like any good investment plan. A Health Savings Account (HSA) is something we mention here and there as a vehicle to grow your net worth over time through regular contributions, just like your 401(k) or Individual Retirement Account (IRA). Let’s delve deeper into it so that you can invest better using a few easy strategies.

HSA: The Undisputed Tax Champion

Health and wealth go hand-in-hand, and the HSA has emerged as a powerful weapon in your financial arsenal to make healthcare expenses a bit more manageable. An HSA is a tax-advantaged savings and investment account designed to help individuals and families with High-Deductible Health Plans (HDHPs) cover their medical expenses. (More on what an HDHP is later.) 

The beauty of an HSA is that your contributions are tax-deductible, the earnings grow tax-free, and withdrawals can be tax-free for qualified medical expenses, including doctor's visits, prescriptions, and some dental and vision costs. It is like the tax-triple-crown victor on the personal finance playing field. Oh, and if you contribute through your employer’s payroll, then you can bypass Social Security and Medicare taxes, too.

Why Younger People Should Take Advantage of an HSA

Health Savings Accounts are particularly valuable for millennials and Gen Zers since younger people generally don’t have very high annual healthcare costs compared to, say, folks nearing or in retirement. In fact, a recent study found that 48% of the younger generation are investing for retirement through an HSA.

Before we get to savvy investment strategies with your HSA, let’s lay some ground rules for why HSAs can be the MVP of your long-term financial strategy.

Know Your Benefits Package, Build Your Wealth

You can’t just open an HSA like a typical savings or investing account. You must first have health insurance, but not just any kind of health insurance - a high-deductible health plan (HDHP). A high-deductible health plan generally has lower monthly premiums and, as you might have guessed, higher annual deductibles compared to other plans. Many employers offer an HDHP in their benefits package, so be sure to check with your HR Department if you have questions. 

The Internal Revenue Service (IRS) Code outlines the yearly minimum deductible dollar amount for HDHPs. The IRS also issues annual HSA contribution limits – one amount for individuals and another for those who have family medical insurance plans. Also, people age 55 and up can contribute an additional “catch-up” amount. Per the rules, you can also take your HSA with you when you switch jobs and there is no “use-it-or-lose-it" restriction like with Flexible Savings Accounts (FSAs). 

And if you are late to the party, no sweat. So long as you are enrolled in an HSA-eligible health plan as of December 1, then you can make a full-year contribution so long as you continue in the health insurance plan through the following year. 

An HDHP Is Not Always the Best Health Insurance Plan

Of course, it’s up to you to determine if electing an HDHP makes sense over a high-premium, low-deductible plan, but if you are in good health, then the HDHP might be right for you. Also, if you are just starting a family, then an HDHP might not make as much sense since those kiddos can quickly run up medical bills. So, while the benefits of an HSA are fantastic, you must weigh what is ideal for your situation. The good news is that you can revisit the choice each year during your company’s open enrollment period. 

Make It a Priority to Invest Through an HSA

Assuming you have an HDHP, then you should consider contributing to the HSA as a high priority in your savings plan due to its triple-tax benefit of tax-deductible contributions, tax-free growth, and tax-free qualifying withdrawals. No other savings account boasts such a set of benefits. 

What’s more, many companies these days offer an HSA match – if you put in, say, $1,000, then your employer might plop in an additional $1,000 at no cost to you. For 2023, the annual contribution limit between you and your employer is $3,850 ($4,150 in 2024) for individuals and $7,750 ($8,300) for families, and those amounts are typically increased each year for inflation.

Stealth Wealth: Treating Your HSA like It’s a 401(k) or IRA

So, the whole point of an HSA is to get you to save more on your own to pay for health care expenses as they occur. That’s a fine approach, but a better method is to treat your HSA like an IRA or any other investing account. 

Here’s how it can work: Contribute to your HSA and invest in stock-heavy mutual funds as you would with a 401(k). As inevitable medical bills come up, pay for those out of pocket if you can, leaving your HSA untapped so it can continue compounding. Be sure to save your receipts (you can do that on the cloud, on a spreadsheet, or with a flash drive). Then, decades down the road, you can “reimburse” yourself by withdrawing from your HSA tax-free up to the amount of your total qualified expenses over the years.

Penalty-Free Withdrawals in Retirement for Non-Health-Care Expenses

By considering your HSA as a stealth retirement account, you can turbo-charge your long-term savings and reach financial independence sooner. Retirees also love HSAs since withdrawals for non-health-related reasons are penalty-free beyond age 65, though income tax is still owed. Financial planners generally caution that HSAs are not great accounts to leave to heirs, so spending it down during your golden years is often advised. Another HSA benefit is that you can treat it like an emergency fund. Let’s explore how that works.

HSAs As an Emergency Fund

Suppose you’ve had an HSA for 20 years and have contributed the maximum amount annually while investing it in a diversified way. The account could be worth upwards of $250,000 if you were able to avoid withdrawals while earning solid returns. Now let’s say you face a financial emergency, maybe a temporary job loss or a costly auto repair. You can pull from your HSA tax-free, penalty-free up to the amount of your prior qualified medical expenses (assuming you have kept your receipts). That’s how the “reimbursement” aspect comes into play, and the same logic works if you defer HSA distributions to your retirement years.

Action Plan

  1. Choose a high-deductible health plan at work or consider buying one privately if you do not have access to insurance on the job.

  2. Establish and fund an HSA. This is often done during benefits enrollment, and you can set up contributions each pay period just like how your 401(k) works. You generally have until Tax Day the following year to make contributions and companies typically let workers tweak their contribution amount whenever they’d like.

  3. Determine your investment mix. If you are young and can pay out of pocket for healthcare expenses as they come up, then investing aggressively in a stock-heavy allocation could be the best move.

  4. Max out your contributions each year and be sure to take advantage of any employer contributions. If you are 55 or older, don’t miss out on the additional catch-up contribution opportunity.

  5. Keep detailed records of your medical expenses, including receipts and invoices, so that you can reimburse yourself years or decades down the line, thereby allowing your HSA to grow and grow.

  6. As always, be sure to monitor your asset mix and perform a rebalance each year or two so that the level of risk fits your goals and risk tolerance.

  7. Consider maintaining a separate emergency fund or rainy-day account so that you can avoid tapping your HSA, which then allows you to treat your HSA like a long-term retirement investing account.

  8. Avoid non-qualifying withdrawals since you may face a 20% penalty in addition to owing regular income tax on the distributions.

The Bottom Line

Pairing an HDHP with an HSA can be an effective way to grow your net worth over the years. By following the steps outlined above, you can leverage this powerful long-term investment vehicle that features a slew of tax benefits. At Allio, we want you to have a well-rounded personal financial plan, and that includes how you save and invest with an HSA.

Allio’s mission is financial wellness for all. You can get started today by downloading the app and automating your investing strategy with Allio. 


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