Oh… you never heard of an HSA?
You’re not alone.
During the 200+ interviews of the podcast, Millionaires Unveiled, the co-hosts Clark and Jace have commented more than once how they’re surprised there aren’t more millionaires taking advantage of an HSA as part of their overall investment portfolio.
Why aren’t they used more? It could be because HSAs are relatively new, only having been introduced to the investing scene in 2003 by President George “Dubyah” Bush. But the reason why HSAs are being underutilized is not because they’re bad. They’re just unknown and undiscovered.
HSAs are pretty much the bookish girl Laney from the 90s teen movie She’s All That, so smart and full of potential. It’s not until the end of the movie when Freddie Prince, Jr. sees Laney for the first time without her glasses to reveal the romcom realness that had been hiding underneath all along.
Well Moneymakers, it’s time to remove the eyeglasses on HSAs and see them clearly!
For starters, it’s not the same as an FSA
Sorry, Mary! It’s not the same thing. If you ask me, Flexible Spending Accounts (FSAs) are busted with their triflin’ rules of no leftover money being rolled over to the next year. That’s garbage.
And frankly, you deserve better.
As explained by this blog post, an HSA has a triple tax benefit:
1: the funds are not taxed when put into an HSA (lowering your taxable income for the year),
2: any earnings made through investments within your HSA funds (which I’ll demo in a bit) grow tax-free, and
3: the money taken out is not taxed when used for qualified medical expenses.
After age 65, money can be withdrawn for non-medical purchases, but it will be taxed as income (which would have it operate similar to a Traditional IRA).
Why an HSA should (maybe) be in everyone’s portfolio
For many people, the cost of healthcare in retirement is the biggest unknown expense.
Even if you’ve lived a healthy life and avoided any catastrophic medical bills, you still have to pay the high premiums of health insurance in retirement. I hear retirees say they pay upwards of $1,000/month per person for their insurance before they’re old enough for Medicare to kicks in. $1,000 a month!
Wouldn’t it be nice to have a pot of money to draw from when you reach retirement so you don’t have to dip into your bucket of fun money you’ve saved up for vacations, restaurants, and living the good life in your golden years?
This is where an HSA comes in.
You can use your HSA for copays and most medical expenses that pop up during your working years and in retirement. Here’s a list of some of the IRS-qualified medical expenses and over-the-counter (OTC) medicines you can buy with your HSA funds.
Is an HSA right for you?
If you live a healthy lifestyle and rarely need to use your health insurance, you could be a good candidate for an HSA. Because an HSA requires you to be in a High Deductible Health Plan (HDHP), you will pay a higher deductible anytime you need to utilize your insurance.
The tradeoff, however, is that you will pay a lower monthly premium. And… extra money will be deposited into a Health Savings Account for you.
For me, making the switch was a no-brainer, because I used my VA health care a couple times in the first 7 years of my current job but never tapped into my employer-sponsored health insurance. So, that money for health insurance was coming out of my paycheck every month, going unused.
The time to get enrolled is NOW
If the idea of starting an HSA appeals to you, open season to change your health care provider to a HDHP is happening right now, running from 11/1/21 until 1/15/22, according to https://www.healthcare.gov/quick-guide/dates-and-deadlines/.
Choose a HDHP like Aetna or GEHA to have $66/month or $75/month automatically deposited into your HSA. https://tspstrategies.com/long-term-investing/for-open-season-do-you-prefer-an-fsa-or-hsa/ I had both of those options available to me, and enrolled with GEHA for the higher amount they contribute to the HSA every month. It was also the same plan that a coworker had chosen for his family, so I trusted his judgment on that as well.
Adding extra to an HSA
Maximum contribution limits are $3,650/year (as of 2022), so as a government employee I have that automatically deducted from my paycheck every two weeks. I set up the extra contribution through the “Health Savings Account” tab of myEPP. For non-government employees, you may need to ask your HR rep for your situation.
Now that I’m enrolled in a HDHP which is paired with an HSA, my employer puts $75 into my HSA every month ($900/year).
As an important note from one of my readers, that employer contribution counts toward the $3,650 max individual contribution. (Thanks for the heads up on that, John from the comment section!) If you’d like to verify that fact for yourself, I found it cited by this article from the Society of Human Resource Management:
Employer HSA contributions are not treated as taxable income but do count toward employees’ annual contribution limit.
That means $3,650-900= $2,750 is the maximum I can contribute each year to my HSA.
With 26 pay periods in a year with my employer, that means I can max out my HSA with $105 each pay period ($2,750/26= $105). Altogether, that brings my automatic HSA contributions to $3,630 without going over the limit.
How to invest the money in your HSA
After you have $1,000 in your HSA, you have the ability to start investing it, like you would the funds of an Individual Retirement Arrangement (IRA).
Setting it up to be invested wasn’t too difficult. I just went to my account at HSAbank.com and followed a few steps to get it started.
From there, I filled out a couple quick online forms and I was done!
My HSA has 13 years to grow until I’m eligible to retire from my government job (which will be at the ripe age of 55). Next up, I will look for the equivalent of VTSAX to invest my HSA funds. Once I have $3,000 in my HSA, I will have enough for the minimum investment to get started with VTSAX and set up what’s called an “auto-sweep” to automatically pull together any new contributions into my Health Savings Account and invest them in more shares of VTSAX without my needing to lift a mouse-clicking finger.
And at that point, with the money in my Health Savings Account invested in the market and assuming an average compound growth of 8% a year, my HSA is projected to grow to over $90,000 by the time I retire.
My HSA contributions and projected growth
|My Age||Contri-butions||Balance with 8% Growth|
Above is an estimate of my HSA’s projected growth, assuming I didn’t need to pull any money from it for qualified medical expenses. I just started mine, so you could easily create the same results for yourself before you hit retirement.
To hack or not to hack…
I’ve often heard members of the FIRE community talk about a financial hack where they set up an HSA but pay out of pocket for qualified medical expenses. As the years go by, they organize the receipts for their medical expenses in a folder saved to the cloud to be accessed later. Then, when they reach retirement, they will reimburse themselves from their HSA for all those expenses they paid out of pocket for. This allows the HSA to grow as much as possible without the principal being eaten away by withdrawals during a person’s working years.
Personally, this sounds like a lot of extra work I don’t care to do.
Second, if I were trying to avoid using my HSA, I believe it would create a bad habit of ignoring my health issues and doing less preventative maintenance for my long-term wellness.
You hear about it with people who never take any sick leave during their entire 30+ year career. And then they retire with some type of major health issue.
Kudos to them for achieving a gold star for perfect attendance. But boo to them for going to work sick and possibly making their coworkers sick. And also, boo for putting their own health at risk with less days taken off to rest, and instead, letting stress and illnesses have a better chance of compounding over time.
When I retire, I want to have as much of my health left as possible to enjoy my golden years. That’s why I have no qualms about putting my HSA debit card to use for qualified expenses when they arise.
In fact, I used my HSA recently to visit a chiropractor, who helped me assess my foot pain to determine it was not plantar fasciitis but a bruised heel. I also paid $50 from my HSA to have an x-ray (which was the lower out-of-pocket cost to have this done) to ensure I didn’t have a hairline fracture in my heel. From there, I got on a treatment plan to address the root cause of my foot pain, and I’m happy to report that it’s been about 6 weeks and my foot is almost fully healed.
Using the HSA debt card was super convenient, too! At the x-ray clinic, pharmacy, or doctor’s office, I just swiped my HSA debit card the same way I would have done with a credit card.
But wait! Before swiping my HSAbank card, there’s this…
My enrollment with GEHA for my healthcare plan includes a new program they started to incentivize people to take steps toward a healthy lifestyle. By taking part in a slew of activities you’re already doing (like annual doctor’s visits and flu shots), you get money dropped onto a GEHA Rewards card.
Here’s some of the ways I can earn money to use on qualified medical expenses before I even need to touch the funds in my HSA.
To be honest, I just got hip to the jive on how things work with this other debit card I got from GEHA, so I’m going to try using that one first from now one, before my HSAbank debit card.
My future plan for my HSA
When I reach retirement and have around $100,000 in my HSA to draw from, what then?
Will I use the money to put toward a $1,000/month health insurance premium in retirement?
Will I rely on my VA healthcare only?
Will I move out of the U.S. where health insurance and healthcare is dramatically cheaper?
Will universal healthcare make health insurance less of a concern by the time I retire?
Lots of questions I still need to answer… questions that no one can answer at the moment. But for now, at least I know that I’ll have some extra options for myself in retirement, thanks to the triple tax savings I’m getting with the money I’m setting aside (and investing) in my HSA.
While the news outlets may be stressing people out about the rising cost of health care and how we’re all screwed, I’ll focus on taking care of my health and setting aside a little every month for my new love… my HSA.
For my coworker Ross W. and the people in the FIRE community who first introduced me to HSAs, I’m eternally grateful!
That’s all I got for you this week. After you finish with all the food and football and food-induced comas over the Thanksgiving weekend, consider looking into whether an HSA might be a good fit for you. And by this time next year, you too could be feeling #blessed.