Self-Directed HSAs: Another Opportunity for Tax-Advantaged Growth with Private Lending

Self-Directed HSAs: Another Opportunity for Tax-Advantaged Growth with Private Lending

By Clay Malcolm, New Direction Trust Company

You may earn your day-to-day living through loan origination, and you may have heard that you can engage in similar lending practices with tax-advantaged retirement accounts like IRAs or 401(k)s. A less-discussed but equally viable savings option is a health savings account (HSA), which allows self-directed investors to save specifically for medical expenses instead of retirement in general. Like their retirement-oriented counterparts ,HSAs bear considerable near and long-term tax benefits and can adopt alternative investment strategies like private lending.

Not all HSA custodians enable their clients to self-direct their investments, and fewer still will permit alternative assets (another parallel to retirement investing). If you’re interested in lending money with your HSA, finding a suitable custodian will be your first step. Once you’ve opened and funded a new self-directed HSA, you can originate new transactions using your familiar approach.Even though you’re acting on behalf of your HSA—which serves as the “investor” in this model—you can qualify potential borrowers, make final decisions on terms such as interest rates and loan durations, and prepare the applicable documentation (including security documentation if you so choose).

For those inexperienced with HSAs, let’s review the substantial benefits of these accounts:

Contributions:

HSA contributions can be deducted from your annual income for tax purposes, providing an immediate benefit regardless what the future holds. For example, if you earn $50,000 in a given year and contribute $3,000 to your HSA, you may deduct the contribution and pay taxes on only $47,000 instead of your full income.

To open and contribute to an HSA, you must have a high deductible health plan (HDHP) with deductible minimums of $1,350 for single coverage and $2,700 for family coverage. Single HDHP participants may contribute up to $3,450 per year while family HDHP participants may contribute up to $6,900 (as of the 2018 tax year). HSA holders may contribute an additional $1,000 per year if they’re age 55 or above. These HSA contribution limits will not impact those of any other tax-advantaged plans you may have.

Distributions:

HSA distributions can be 100% tax-free, regardless of your age, if they’re applied toward qualified medical expenses (QMEs) or reimburse you for QMEs already paid (only if the expenses were incurred after you opened the HSA and made your first contribution). Your spouse and anyone you may claim as a dependent can yield these same benefits even though they’re not the HSA holders and even if you don’t have family HDHP coverage.

You may think the list of QMEs is loaded with obscure emergencies that most people will never endure, but that’s not the case. Among others, QMEs include:

• Routine physicals

• Chiropractor visits

• Vision expenses (exams, glasses, contact lenses)

• Prescription medications

• Psychological care

• Surgeries

Non-QMEs include cosmetic surgeries, illegal procedures, non-prescription medications (though insulin is a QME), nutritional supplements, or gym membership fees. See IRS Publication 502 for the full list of qualified and non-qualified medical expenses.

HSAs provide a unique opportunity to never pay taxes on a portion of your income even as the account increases in value. From our previous example with the tax-deferred $3,000 contribution, let’s say you issue those funds for a short-term loan with a 10% interest rate. Your HSA will hold $3,300 upon successful completion of that transaction. You then sustain an unfortunate injury for which you’ll need the full HSA balance. You can distribute those funds and cover your expenses, all without ever paying a penny of taxes on the $3,000 contribution or the $300 profit.

An HSA can be a game-changing piece of your overall financial puzzle, and your proven private lending method can effectively fuel this vehicle. For more information about HSAs, please review IRS Publication 969.

Clay Malcolm is Chief Business Development Officer at New Direction Trust Company, a custodian of self-directed investment accounts that hold alternative investments. Mr. Malcolm provides preliminary and continuing education to anyone interested in promissory notes, real estate financing, and other loan structures as assets in IRAs, 401(k) s, and other such tax-advantaged or taxable investment plans.

CONTACT: cmalcolm@ndtco.com | 877-742-1270 (Ext. 113) | www.ndtco.com