When it comes to retirement saving and investing, many people stop with an employer-sponsored program (like a 401(k) or pension) or an Individual Retirement Account (IRA). Both are great, offering tax-deferred growth and preferential tax treatment either when contributing (as with a Traditional account, the most common) or in retirement (as with a Roth account). There is one long-term savings vehicle, however, that is often overlooked.
A Health Savings Account (HSA) is a special type of account that allows people with high deductible health insurance plans to save for medical expenses. (You can find out if your health insurance qualifies as high deductible using this IRS publication.) Many HSA providers allow a portion of funds to be held in investments such as mutual funds, ETFs, and sometimes even stocks.
The HSA enjoys a triple tax benefit, making it an important and unique – yet often ignored – savings vehicle. Contributions to HSAs are pre-tax (reducing taxable income), grow tax-deferred (interest, dividends, and capital gains are not taxed while held in the account), and withdrawals for qualified medical expenses are tax-free. (However, withdrawals for non-qualified expenses before age 65 will incur an automatic 20% penalty, in addition to owing income tax on those funds.)
While annual contribution limits are relatively low ($3,600 for individual coverage and $7,200 for families in 2021), a savvy and patient saver need never pay taxes on contributions, growth, or withdrawals.
Unlike a Flexible Spending Account (FSA) or a Health Reimbursement Arrangement (HRA) – which are owned by an employer – an HSA is owned by an individual. This means that the assets in an HSA belong to the account holder even after changing jobs or retiring.
Furthermore, while an individual cannot contribute to an HSA after age 65 (when Medicare benefits kick in), there is no required minimum distribution age for an HSA – unlike a 401(k) or Traditional IRA. Assets can be held for decades after retirement, allowing for further compounding. Since health care expenses tend to go up later in life, the HSA provides a nice compliment to more common savings vehicles like 401(k)s or IRAs.
Even better: after age 65, an individual can use withdrawals for any purpose – medical or non-medical – without paying the 20% penalty. (Non-medical withdrawals would then be taxed as income, but withdrawals for qualified medical expenses are always tax-free.)
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.