The Best Retirement Fund You Never Heard About

HSA accounts are a Triple Tax Advantaged account that puts money pre-tax directly from your paycheck, Grows tax free and is withdrawn tax free specifically for medical reasons.

Health Savings Accounts (HSA) is the best retirement fund and investment vehicle to have because it is unique in having a triple tax advantage.

It has pre-tax advantage meaning that it will lower your total taxable income . It has post tax advantage meaning that both the investment gains and withdrawal for specific medical reasons are also going to be tax-free.

There are so many benefits to having an HSA account that I would like to elaborate more in this article. This coincides with open enrollment in this month and so by reading this article I hope to educate and enlighten some of your decision making when you choose your benefits for 2020. 

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How do I invest in a Health Savings Account ? 

The first step to opening in the health savings account is to elect from your job or from the exchange, a high deductible plan eligible for a health savings account.

Only High deductible plans allow you to open a health savings accounts. PPO and low deductibles do not allow any supplemental accounts this includes HSAs and FSAs.

Most HSA accounts are additional benefits that you can elect into through your work in which case the next step they would ask is how much would you like to directly put from your paycheck.

2020 Contributions for HSAs

Maximum contribution amounts for 2020 are $3,550 for self-only and $7,100 for families. The annual “catch- up” contribution amount for individuals age 55 or older will remain $1,000

Unlike flexible spending accounts, health savings accounts are carried forward indefinitely and can be rolled over from one HSA account to another if you switch jobs.

The IRS has also specifically mentioned that health savings account can be accessed and withdrawn from any time during your lifetime as long as you have retained medical bills that prove you have paid or need help paying when you open the claim.

This is key to opening a health savings account. The ability to tap into this account whenever life hits you hard is invaluable. As long as you have the proof that you have paid medical expenses in the past, you can access this account and withdraw it free from taxes ! 

And This contribution comes directly pretax from your paycheck so in order to max out that contribution you would need to do a little bit of math.

I will be using myself as an example throughout the article , My Effective Tax Rate is %22 and i will assume i’m using the contribution limit of 2019 of $3500 for individuals and $7000 for families.

I get paid on a biweekly basis, 26 paychecks a year. So if I divide $3500 divided by 26 that would equal $135 per paycheck.

When it is broken up into small pieces of $135 a paycheck it seems almost insignificant, very trivial, and also very easy to get the full amount per year.

But this contribution essentially lowers my tax rate by 3500×22%=770$ As an added bonus.

Remember this number for the very end.

Investing your Health Savings Account

As we mentioned earlier HSA accounts are not meant to be savings accounts, they are exclusively another investment account.

Different Companies allow different funds to be invested in. Some allow mutual or index funds only, while others may allow Exchange traded funds or individual stocks. This is very different based on each company -or institution you open your HSA account in if an independent – e.g Vanguard or Fidelity.

When in Doubt , always go for a broad S&P 500 index that tracks the general US economy . This Diversifies your investment among all the top companies in the economy equally and minimizes the risk.

By electing to contribute the full $3500 pretax and taking that money and investing it in a simple index fund or an ETF that tracks the S&P 500, you’re taking the 3500 and increasing it by 8% per year on average.

3500x 8%= 280$

Now keep this number in mind and read on.

HSA Advantages

One of the unknown facts about HSA accounts is that you can also get an employer contribution just for opening an account .

Most employers will contribute an additional amount a year if single Or twice as much for a family if you contribute to your health savings account. These numbers vary from company to company but roughly it’s 10% of your investment worth in free money.

This free money is one of the pillars of financial independence is not refusing free money. If you are a family of four like mine, and your spouse works at a separate company with separate benefits, you can split the children between both company HSA plans and get double the benefits from each company.

Let me explain: I get paid $400 single and $800 as a family per year from my company. But family is defined as one adult and one child so in essence just me and one of my children would give me the full $800 benefit.

My wife through her work receives $600 As a single and $1200 as a family contribution.

So in total we are getting $2000 worth of free money for contributing $7000 worth of tax advantage money every year.

How much can I make per year ? 

Let’s take all the numbers we have calculated up until now and figure out in the previous example how much my family saves just my contribution to health savings account every year .

Direct contribution(both)=$3500×2= $7000

Company matching = $1200+$800 = $2000

Pretax money saving = $770×2=$1540

Average investment gain = ($7000+$2000) x 8% = $720

Final total is the sum of all the above  $7000+$2000+$1540+$720 = $11260

That is an insanely good return on investment of almost %61 All for investing a total of $7000 into an account ! 

Now for the True Magic ! Let’s Plug this into a Compound interest calculator and see how much our investment will grow in 30 years assuming an 8% Return and company matching every year :

On Average the Return will be $1,019,548.90 after 30 years. That could be higher or Lower depending on how much you contribute in any given year ! There are years that you will end up using some of that $11260 Like I needed this year and the yield will be lower.

However, you are continuously contributing to the HSA and reinvesting the gains and using your Emergency funds to pay out of pocket expenses as much as possible to let that account Grow .

On Average over one million dollars is more than enough to cover all medical expenses in your families life time ! and even though healthcare costs continue to Rise ,the principle will continuously grow if you don’t withdraw from it until retirement .

A 65-year old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement, Fidelity estimates, but it says it is possible to save for retirement health costs via health savings accounts.

Reported by REBECCA MOORE

About the High Deductible

Here is where we’re going to discuss the caveats for health savings account.

While these types of gains are insanely good, there are some requirements that you have to keep in mind in order to be able to do this the correct way. 

• You have to have a good emergency fund cushion; enough to meet the high deductibles at least in case of an emergency.
• Obviously you have to have the ability to put $7000 extra money every year.
• You have to keep all medical bills that you might incur in your lifetime indefinitely.

one of the most important things you need to be able to anticipate is if you are going to have a major medical problem in this specific year.

For example we were anticipating our daughter was going to be born this year and I had saved up a considerable amount in my emergency fund so that I could pay the out-of-pocket expenses of the high deductible.

I have also kept all the receipts and bills that I have been billed because that is the major requirement by the IRS. 

The final bill was a little over $11,000 for all medical expenses this year . 

But we have been contributing to our HSAs since we started working so every year we have almost $11,260 saved up and invested .

Now all I have to do is pay the hospital bills and keep the receipts for whenever I actually need to take out $11,000 from my health savings accounts. And voila ! I will have tax free money back into my pockets .

Quick Tip : after your hospital sends you an invoice for your final bill a very helpful tip to decrease the final amount is to ask for three things:

An itemized detailed bill, ask for a  hardship discount, and a monthly payment plan if it is interest free ! 

This quick tip is a strategy that allowed me to negotiate a 20% discount and a monthly payment over the next two years making my payment very palatable.

Comparison between High deductible with HSA to Traditional PPO plans

When comparing High deductible plans to typical health insurance like Preferred Provider Organizations (PPO) there are a couple key differences for PPO’s :

1. Once that money goes out from your paycheck you will never see it again.
2. It does not roll over or carryover to the next year.
3. Have high monthly costs
4. Does Not allow any health savings accounts
5. Copays and deductible limits are Lower 

Once you pay for that insurance from your paycheck , even if you do not use it , It is simply gone. Every time you have to pay co-pays that money is also gone there’s no getting it back.

This is a Key Difference to High deductible plans where you may recoup what you pay from an HSA even in the future .

High deductible plans by definition will have a lower monthly payments for example I pay a total of $166 per paycheck or $3840 a year for our health insurance. The average HMO makes you pay $250 per paycheck or $6000 a year for the health insurance.

But Remember, you cannot open any additional accounts with the HMO neither FSA or HSA. So even with this calculation if you wanted to add the expenses to the final numbers the HSA would still be net positive $7420 a year. And the HMO would be net -$6000 a year. 

Even with the Big Hospital expense this year I am Still net $1000 Positive and my investments will continue working for me for years to come.This is why I believe high deductible insurance with health savings accounts maxed out is superior to normal insurance plans. 

Are Health Savings Accounts Worth it ? 

It is all about simple math at the end of the day. Different types of loans – I will call owning non HSA eligible insurance a loan – that perpetuate you to continue to stay in the loan will always be a liability towards your income.

However HSAs would be considered assets even though you are not seeing that money today but your army of dollar bills will be continuously working in your favor investing and growing until the day you actually need it.

Ultimately the best way is to never touch the health savings account is to have a healthy emergency fund to cover all the high deductible expenses you would need in any given year.

And then hopefully when you retire you will have a very healthy and large investment account that you could live off and use specifically for medical expenses for the rest of your financially free life !