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This is the final episode in a 5 part series on different retirement accounts that you can use to optimize your future. The previous 4 episodes have been more focused on general retirement accounts that I think most of us are familiar with: 401ks, 403bs, and the many different IRAs out there. Well, what if I told you there is one type of savings account that we all can use no matter income level and who you are?

I’m talking about the HSA. Health Savings Account. One of the ultimate accounts that operate with a dual purpose for you. On one end the HSA can serve as a bank account that you defer your income towards and use for future medical expenses. The money never expires and is always there for you to use. One tip, before you get medical service, check to make sure that doctor or whoever can accept your HSA payment.

How Much Can I Save Yearly?

There are saving limits for us all. As of 2018 the maximum contributions you can make to an HSA is $3,450 for a single person and $6,900 for a family. Similar to other retirement savings accounts you have catch up contributions that applies to those age 55 and older. You all get contribute an extra $1,000/year. Hopefully these limits increase over time, because of the ever increasing cost of healthcare and challenges retirees face when it comes to coverage.

How Does the HSA Work?

Having an HSA means you’re going to have a high deductible health plan that makes you eligible for a bank type of account where your HSA funds will exist. This is your health savings account. And it’s yours to keep no matter if you decide to change health plans in the future.

Because of the high deductible plan you will come out of pocket for basically every medical expense until you reach the deductible. And you can use the money in the HSA as long as the medical expense is qualified. Some include contact lenses, glasses, home care, stop-smoking programs and many more. Here is a list of qualified medical expenses. 

Remember after you hit your deductible you get into the 80/20 or 90/10 part of your health plan, where you pay 20 or 10% of medical bills and insurance covers the rest. And after that once you reach your out of pocket maximum, insurance will typically start to cover 100% of all medical expenses.

Funds in an HSA also have an investment component as well, not just a savings. As you all know saving and investing for the future is important. What’s more important? Saving, investing and planning for healthcare in retirement. In the HSA at my workplace we get exposure to Vanguard’s Total Stock Market Fund and other low cost index funds. This is key as we plan to build our HSA over the next 20 to 30 years and I don’t see any better way than to do this with low cost index funds.

A great part about saving in an HSA is that you don’t pay normal taxes on the contributions and you also don’t pay medicare and social security tax either. In order for your contributions to not subjected to federal income tax, Medicare tax or Social Security tax, you have to make pre-tax contribution. Any after-tax basis contributions will be subject to all of those taxes. Unlike other traditional retirement accounts where you only get the income tax-deferred advantage you actually get a little extra to contribute that you’d otherwise pay towards social security and medicare taxes.

Triple tax-advantaged:

• Contributions are pre-tax or tax-deductible.
• All earnings and interest are tax-free.
• Do not pay taxes on any withdrawals for qualified medical expenses.

What Happens if I Don’t Use HSA Funds Yearly?

One of my favorite parts about the HSA is the opportunity to save for retirement. Whatever money you don’t use in an HSA keeps rolling over to making the HSA a great bucket to have, especially if you’re young. Twenty or thirty years of saving in an HSA can literally cover all of your expected healthcare costs if you plan right.

A great part of having an HSA is all those funds are accessible to you after the age of 65 penalty free. You just pay income tax on non-medically qualified expenses. Remember in your 401ks and IRAs you have to wait till you’re 59 1/2 to start using without penalty. If you try to access HSA money before 65 for anything other than qualified medical expenses you’re looking at paying income tax plus a 20% penalty. Geez, that’s a lot.

As long as you’re saving and doing your best to max out each of these buckets over the next 20 to 30 years with low cost funds, something tells me you’ll be fine in retirement. If you can learn how to manage an HSA you’ll gain the knowledge and education over time create the best healthcare coverage plan in retirement.

Strategies for Using an HSA?

There’s one main strategy that I want to discuss. Let’s say you build up the HSA over time and in one year you have a medical expense that qualifies to be paid by the money in your HSA. Well you don’t have to use your HSA funds. You can leave the money to sit there and continue growing. Pay out of pocket and any time you want you can reimburse yourself from the HSA months later or years later. Basically you give the funds in the HSA time to grow never disrupt that growth and actually never really come out of pocket for medical expenses, because you’re paying yourself back with the growth of the HSA.

Make sure to KEEP RECEIPTS. Store them in a briefcase, download them to a Google drive or whatever you have to do maintain copies.

Where to Open an HSA?

Depending on your type of employment you may have an HSA as an option at work and don’t even realize it. My job didn’t have the HSA plan available as an option until the past few years, but this is the first year we’ve enrolled into the HSA plan. Before this we’ve used and I’ve always been under the HRA, Health Reimbursement Account. Now it’s HSA all the way.

If your place of employment does not provide access to an HSA or you’re self-employed then you can still apply to have an HSA at places with financial institutions like Vanguard offer individual HSAs. Even banks and credit unions offer HSAs. You’ll just have to do some research and compare plans. Watch out for fees and investment choices. Also, check to see if the HSA custodian has user friendly presence online.