The Triple-Tax Advantage with a Health Savings Account
Published on January 27, 2022
We’ve written before about health savings accounts (HSAs) and the triple-tax advantage account owners can enjoy with these accounts. HSAs were created as a savings plan for individuals with high-deductible health plans, in which the funds can be used for qualified healthcare expenses such as premiums, copays and deductibles, medical equipment, prescriptions and more. However, the benefits of HSAs go beyond just that, and this has made HSAs more attractive to individuals saving for retirement.
According to the September 2021 report from Devenir on HSAs:
- There are now over 31 million health savings accounts, a 6% increase year-over-year
- Almost $24 billion was contributed to health savings accounts in the first half of 2021
- Total HSA assets reached $92.9 billion, a 26% increase year-over-year
- HSA dollars that are invested soared to $30.4 billion, up 73% year-over-year; this represents almost two million accounts that are investing a portion of the funds
And, yes, you may open a self-directed HSA and invest the funds you’re contributing through alternative assets!
Some HSA basics
In 2022, the contribution limits on HSAs are $3,650 for single-coverage plans and $7,300 for family-coverage plans. Account owners aged 55+ may contribute an additional $1,000 per calendar year (similar to catch-up contributions for retirement plans).
Account owners are required to stop contributing to their health savings account six months prior to applying for Medicare to avoid penalties. If your employer offers an HSA, the employer contributions must also stop once you apply for Medicare.
Once you are enrolled in Medicare, you may still invest or use/distribute the money in your HSA.
The triple-tax benefit
The triple-tax advantage is one of the most enticing features of a health savings account for the following reasons:
- The contributions to an HSA are tax deductible
- The withdrawals are not taxed when used for qualified medical expenses
- The funds grow tax free, providing a long-term savings vehicle
- Unlike flexible spending accounts, you don’t have to spend down the balance.
- The more you contribute, the lower your tax bill may be and the more money you’ll have to cover out-of-pocket medical expenses—and to invest.
Added benefits of HSAs
Yes, you can use your HSA as an investment tool! Rather than allowing the account to accrue interest over time, it can also be self-directed, which provides the opportunity to actively invest in alternative assets. This strategy provides retirement portfolio diversification and added control over investment returns. Self-directed investors may open a self-directed HSA at Next Generation and invest account funds in assets such as real estate, private equity, cryptocurrency, promissory notes/loans, precious metals and much more.
Example of using an HSA as a long-term savings and investment tool
Let’s say you open the account in your early-30s and you contribute the maximum amount every year. You can set aside a cash cushion to cover qualified medical expenses and invest the rest, strategically, per your knowledge of nontraditional investments. Once you’ve completed an investment, you can reinvest the funds. Over the span of 30+ years, you may have amassed a healthy savings account, which has grown through those investments, and upon retirement age you can start using those funds as you see fit:
- Use HSA funds tax-free for medical expenses, Medicare premiums, or certain long-term care expenses or insurance.
- After age 65, use HSA funds for other (non-medical) expenses without penalty (you will still be taxed on those distributions).
Even better, there is no minimum required distribution nor do you have to start withdrawing funds by age 72 as you do with an IRA.
Next Generation makes it easy to open a health savings account, and our helpful professionals can answer your questions about the alternative assets that can be included in your HSA or any self-directed retirement plan. You may schedule a complimentary educational session, or contact our team at NewAccounts@NextGenerationTrust.com or 888-857-8058. You can also text us at 848-233-4076.