Why a Health Savings Account is the Best

An HSA or Health Savings Account is a type of triple-tax-advantaged account. Any money you put in is tax-deductible. Any money you make in the account is tax-deferred, and any money you spend on qualified health expenses is tax-free.

What is a Qualified Expense?

For HSA’s, qualified expenses include paying for doctors visits, prescription and off the counter medication, hospital stays, therapy, and other medical related bills. You can also use your HSA account to pay for your spouse’s or children’s medical bills.

When can you use your HSA?

You can use your HSA at any time. You can even use your HSA to pay a medical bill from years ago. Some HSA banks and brokerages require receipts and some don’t. With the typical HSA, you get a debit card with a savings account and a brokerage account. Some HSA’s do not have brokerage accounts available. You will want to avoid these companies. Instead, open an HSA where you are offered both an HSA savings account and brokerage account. In most cases, you need to save a minimum amount before you are allowed to invest in the brokerage account. In my case, I need a minimum of $2000 in my HSA savings account to invest in my HSA brokerage account, where all of my money grows tax free as long as I spend it on medical bills. The $2000 covers doctors and pharmacy visits and the rest is invested.

Who can open an HSA?

First of all, you need a high deductible health insurance plan. These high deductibiles can run you up to $3000 per year before health insurance kicks in. This is the perfect plan if you are a generally healthy person. Contrary to popular belief, you don’t need to have your HSA sponsored by your employer. You can get an HSA through your employer or you can find your own HSA elsewhere. Fulton Bank, HSA Bank, and Optum Bank partnered with Betterment offer HSA’s. Getting an HSA through your employer is often the best way because your employer may offer health bonuses. For example, my employer will contribute $1500 per year towards my HSA if I simply track my steps, take an annual flu shot, get my annual physical, and take a few 10 minute online courses on different health related topics. That is EASY money.

How much can you contribute to your HSA?

An HSA has an annual contribution limit, just like you get with an IRA or 401k Plan. As of 2021, the limit for an HSA is $3600 per year for individuals and $7200 per year if you have your spouse and/or child under your health insurance family plan. If you open an HSA with a brokerage account, your money is invested conservatively in the stock market, typically in the form of Bonds and ETF’s or Index Funds. You can except an annual growth of 4% to 10%. That is much better than the 0.01% you get from a savings account offered by a brick and mortar bank or the 0.5% you can get from an online savings account. If you and your spouse both have individual HSA accounts, the combined limit would still be $7200 per year. If I contribute $7000 in one year, my wife would only be able to contribute $200 in that same year. If your employer contributes money to your HSA, it WILL count towards your annual contribution limit.

What if I never use my HSA?

Those in the F.I.R.E. community will often never use their HSA’s for health related expenses. If you can afford to never use your HSA, then don’t. Let the compound interest grow your HSA and utilize the tax benefits in retirement.