Health related expenses continue to skyrocket with no signs of letting up. For retirees, health care costs are estimated to be around $260,000 for a 65 year old couple during their retirement years, according to a recent study by Fidelity.
Perhaps 65 feels like the distant future to you, but when was the last time you went to the hospital and received your bill in the mail a few weeks later? I hope you were sitting down. Even with coinsurance from your insurance provider and employers sharing in the cost of premiums, health care costs are through the roof. Studies anticipate the cost of healthcare to increase by 6% next year. That’s double or triple the assumed consumer price inflation rate of 2-3%.
Small business owners are feeling it, too. My wife and I just signed up for insurance through the Healthcare.gov exchanges. Our max out of pocket is around $13,000. With a child planned next year and my own shaky health history, we could easily hit our max.
How can Americans better protect themselves against the tremendous impact of these costs? Enter the HSA. One of the most exciting saving, investing, and spending tools out there.
Why HSAs Are So Awesome
HSA stands for Health Savings Account. It allows you to save money for spending on future health-related expenses. This money is placed in a savings account where it can continue to grow and even be invested in mutual funds, if you so choose, taking advantage of compounding interest.
Unlike its cousin the Flex Spending Account (FSA), with a HSA you don’t lose any money not used within the year. HSA funds continue with you, year after year.
Only high deductible plans are eligible to use HSAs. Healthcare.gov defines high-deductible plans as any plan with a deductible of at least $1,300 for an individual and $2,600 for a family. As of 2016, about 84% of companies offered a high deductible plan.
Most HSAs have a small monthly fee, which employers often cover. HSAs also have portability, which means they stay with you even after you’ve left your employer. I still have an old, semi-faded HSA debit card in my wallet from my former company. There’s still money on there and it still works!
A Triple Tax Advantage for HSAs
HSAs have phenomenal tax advantages. They are the only financial product I’m aware of which delivers a triple-tax benefit if used appropriately:
- Tax-deductible contributions - Money you contribute to your HSA is tax deductible, similarly to retirement accounts like your 401(k).
- Tax-free growth - The funds invested in your HSA grow tax-free, further enhancing the impact of compounding interest.
- Tax-free withdrawals - When funds are withdrawn from your HSA, they are tax-free when used for eligible health expenses.
Investment Options for Long-Term Growth in Your HSA
As mentioned previously, your HSA savings can be invested in mutual funds if you so choose, and the money grows tax-free. While there is no guarantee of returns, a long-term investing strategy can be incredibly valuable, since the costs of healthcare are forecasted to exceed the pace of inflation. Investing your HSA funds can help your balance keep up with the pace of inflation, rather than be eaten away by it over time.
The argument could also be made of paying for short and medium-term healthcare expenses from other savings and allowing your HSA to remain invested, allowing the added “time in the market” to work in your favor.
Different HSA plans offer different varieties of mutual funds for investment, and some will certainly shine above others. Ask your HSA administrator to provide a list of the investment options and their corresponding fees before investing your HSA money.
A "Stealth IRA"
The final feature I’ll point out is what some financial bloggers are calling a “Stealth IRA.”
See, HSAs take on very similar properties to both Traditional and Roth IRAs. From a tax standpoint, HSAs are tax deductible, like a Traditional IRA, and have eligible tax-free distributions, like a Roth IRA. Similarly to both a Traditional and Roth IRA, HSA funds grow tax-free as well.
Unlike IRAs, there are no income restrictions for contributing to a HSA. The maximum contributions may also be higher for HSAs ($6,750 for families) compared to IRAs ($5,500).
If a HSA isn’t part of your financial plan and one is available to you, I strongly urge you to consider it. The benefits of this incredible saving tool really cannot be overstated.