HSA - The Triple Tax Savings Account
A Health Savings Account, or HSA, has been available to investors since 2003. This should not be confused with an FSA, or Flexible Spending Account, which is not nearly as advantageous as the HSA.
In order to take advantage of the many benefits of an HSA, I have to be enrolled in a High-Deductible Health Insurance Plan (HDHP). The deductible limits to qualify for an HSA is $1350 for an individual and $2700 for a family. When I left the military and had to choose a health plan for the first time in my life, I decided on an HDHP plan through Aetna that has a family deductible of $3,000. I have a payroll deduction of $168 every two weeks as my employee cost of the premium of my HDHP plan, but a portion of that cost is contributed into my HSA - currently $133 every month. So in reality, I am only paying a $203 premium most months for my health care. The deductible means that I have to pay all of my health care costs for the first $3,000 every year, however. We are a pretty healthy family which means that in most years I should not have to spend $3,000 in a year on health care costs, right? This has not been the case, however. 3 of the 5 years we have had this plan, we have crossed the $3,000 threshold. This is largely due to my pacemaker and a few broken bones in the family.
Why is the HSA considered triple tax savings?
The money contributed into an HSA is made with pre-tax dollars.
The money can be invested inside the HSA and it grows tax free.
When you withdraw the money from the HSA to pay for health care costs, no tax is due.
In the 5 years I have used the HSA, I have really only taken advantage of #1 and #3 above. However, I have been considering how beneficial it would be for me to change the way I am using my HSA in order to see it grow tax free.
As I mentioned above, $125 of my premium payments go into my HSA every month. I also have an automatic deduction of $375 per month that is also put into my HSA account. This means I am contributing $6,000 per year into my HSA. This was close to the annual limit back when I started in 2015, but the annual limit has since increased to $7,000 in 2019. I need to increase my contributions to max out the benefits of this account.
We have a Debit Card that deducts directly from our HSA whenever we use it. So we have been able to use that debit card for all health related expenses since 2015. This has helped with the budget since we don’t have to use money from our normal accounts to pay for any health costs. The money in our HSA has also been enough to cover all of our dental costs not covered by our dental insurance. And it has also been used to pay for Luke’s Neurofeedback Therapy this year as well as his functional medicine workup that resulted in his diagnosis of Celiac Disease. This has been a real blessing. So we are taking advantage of the 3rd tax benefit described above since all of our medical, dental, and nontraditional medical costs have been paid for with tax free dollars.
The question I am debating now is whether I want to change the way we use our HSA account in order to take advantage of the 2nd tax benefit, the ability of that account to grow tax free until retirement. I did move some of our HSA account money from the default option of a low-yield savings account a couple years ago, but as I mentioned above, we are actually spending much of our HSA money on a routine basis.
Should I cash flow any future deductibles and co-pays and stop using the HSA account for these purposes in order to allow it to grow? What does the math say?
If I invest the max $7,000 from 2020 through 2030 (anticipated year of GS retirement), I will contribute a total of $77,000 ($7,000/year for 11 years). At a 5% rate of return, that annual contribution would be worth $100,000 in 2030.
At that point, I could start to use that account to cover health care costs. This makes sense since health care costs will likely start to increase as we age. Retirement would also be a good time to start using this money since I will no longer have my normal income to cash flow health and dental costs.
How long would that $100,000 last in covering our health costs? There is no way to know the answer to this question. But it should last a very long time since in this scenario I would still have my GS health benefits if I retire after my Mandatory Retirement Age of 57 with full benefits. I will also be able to draw upon my military pension health benefits beginning at the age of 60. And of course I will have access to medicare beginning at the age of 65.
The $100,000 would also remain invested and therefore should continue to grow at a respectable rate. Applying the 4% rule, we should be able to spend up to $4,000/year on medical costs without drawing down on the $100,000 principle.
The HSA account could also be treated like what the White Coat Investor calls a “Stealth IRA” in that we could withdraw that money after age 65 for any purpose, although we would have to pay taxes on any money used for non health care expenses. This would still give us double tax savings, just not triple tax savings.
One way to avoid paying taxes in this scenario would be to withdraw the money for anything after age 65, but account for those withdrawals by using them for any health care expenses we paid for between now and age 65, even though they were paid for with normal income. HSA dollars must be spent on health care in order to be withdrawn tax free, but there is no requirement that the withdrawals be taken the same year the health care was purchased. Therefore, I could save health care receipts between now and retirement and provide those receipts in the case of an audit as the reason for the tax free withdrawals. This would take some effort. I think I would designate a specific credit card for health care purposes and use that card for nothing else. I would then digitize my monthly credit card statement as well as the receipts from our health costs to have them available for future withdrawals. Or an easier option would be to digitize the EOB (explanation of benefits) that Aetna provides me accounting for all health care costs and what I had to pay for them. This would not be that hard to do.
In conclusion, an HSA is a fantastic investment opportunity for anyone with an HDHP. I will be making some adjustments in order to take advantage of all three tax saving opportunities available.