3 minute read
A Feel Good Health Savings Account
A Feel Good Health Savings Account
By Philip Dudley
If you’re enrolled in a high deductible health insurance plan, it may be time for a financial health checkup.
One of the great (if not the greatest) tax free compounders, the Health Savings Account (HSA), is hidden in plain sight and yet is either unknown or mismanaged. The Roth IRA is a popular double tax deferred vehicle for many Americans but income limitations eventually squeeze out high earners from making contributions. The HSA or “Medical IRA” could be a great option for many.
There are times in life when things become very clear. For me it was when a client recently passed away and left 25-plus years of paying premiums into a long term care policy unused because she didn’t check all the boxes for the plan to kick in.
Tens of thousands of dollars went to the insurance company, and that’s when I decided to personally self-insure for future medical expenses. If you qualify, setting up an HSA is easy. You make annual contributions, currently $4,150 for an individual and $8,300 for a family. And there’s a catch up additional $1,000 if you’re over 55.
The strategy does require some discipline. If you can afford it, you basically pay out of pocket medical expenses until you reach retirement while contributing to an HSA and allocating those funds to a long-term capital appreciation strategy. If you’re young enough, contribute the maximum amount for 30-plus years and achieve historical market returns, you will have approximately $500,000 to spend on everything medical related, tax free, in retirement. If you’re following me, that’s tax free contributions plus tax free growth plus tax free withdrawals. This is the only triple tax free vehicle in the U.S. tax code.
Recent studies indicate that only 4-5 per cent of HSA’s receive the maximum annual contribution, only 7 per cent have balances in excess of $10,000 and only 10 per cent of current HSA’s are invested in something other than a money market. Basically, we have a massively underutilized and mismanaged tax deferred vehicle that is used more or less like a savings account with a debit card.
Wrong.
So how do you become a better saver for retirement? Well, first start contributing the maximum amount to an HSA if you qualify. Seek out a financial institution that offers HSA accounts and create a long term investment plan for the assets either on your own or hire a professional.
What about the remaining assets when you die? Don’t worry about it because the account can transfer tax free to your spouse for his/her benefit and upon your spouse’s death the assets are distributed to your children. The children will have to pay income tax on the amount received, but let’s just all agree to call that found money.
