It’s been a while since I’ve written here on Debit versus Credit. Life tends to get in the way, and priorities tend to shift. Somewhere along the way this blog, which once occupied a significant portion of my life, drifted into hibernation. I’ve had the itch to write here and there – sometimes I find a topic interesting enough to make me want to start writing again. Health Savings Accounts, better known as HSAs, are one of those topics.
For years I mostly thought of HSAs as simple healthcare spending accounts; a tax-advantaged way to pay deductibles, prescriptions, and maybe an unexpected trip to urgent care. Great to have? Definitely. Exciting? No, not really. I just didn’t know better.
I’ve been hearing more from financially savvy investors using HSAs very differently than I ever did. It’s not just a medical spending account to them. No, it’s a long-term investment vehicle and supplemental retirement account.
The Triple-Tax Advantage
HSAs offer something very few financial accounts can match: a legitimate triple-tax advantage. They help you avoid taxes during all three phases of investing:
- Contributions are tax-free going in
- Investment growth is tax-free
- Qualified withdrawals are tax-free
Traditional retirement accounts like a 401(k) generally give you a tax break up front, but withdrawals are taxed later. Roth IRAs work in the opposite direction: pay taxes up front but pay nothing on withdrawals in retirement. An HSA can potentially offer both benefits simultaneously.
| Account | Tax Deduction Up Front | Tax-Free Growth | Tax-Free Withdrawals |
|---|---|---|---|
| Traditional 401(k) or IRA | Yes | Yes | No |
| Roth IRA or Roth 401(k) | No | Yes | Yes |
| HSA | Yes | Yes | Yes* |
*For qualified medical expenses
Here’s what I think is most interesting about the HSA: you can take withdrawals from it after you turn 65 that don’t need to be for a qualified medical expense. The only downside? It’s not a tax-free withdrawal. That puts it squarely in line with a traditional 401k or IRA though (as seen in the chart above) with an upfront tax deduction and tax-free growth. Meanwhile, if you do have qualified medical expenses those withdrawals will continue to be tax-free!
Another thing to note is that HSA funds are yours to keep permanently, even if you change jobs or health plans. That long term portability, along with the various tax advantages, are what make HSAs so appealing as a potential retirement tool.
Why You Might Consider Not Using your HSA for Medical Expenses (Just Yet)
Some savvy readers may have had a thought: can I open an HSA and not actually use it for medical expenses and just treat it like another IRA? The answer, it seems, is actually yes. At least right now.
There is currently no deadline requiring you to reimburse yourself for qualified medical expenses.
Consider the following:
You contribute $4,000 to an HSA and invest it. A year later, you incur a $3,000 medical expense. You have two choices here:
Option 1: Use the HSA immediately
You reimburse yourself from the HSA today, reducing the invested balance substantially.
Option 2: Pay out-of-pocket and save the receipt
The rules for the HSA don’t have a timeline on how quickly you have to submit your receipts for reimbursement. Instead of touching the HSA, you could pay the medical bill with cash (if you can afford it) and keep the documentation.
If the invested funds continue compounding for, let’s say 30 years, that original balance could grow many times over. Because there is currently no deadline for qualified medical expenses, you could reimburse yourself years – hell, decades even – later using the saved receipt. That $4,000 could turn into $40,000 over 30 years. If you really could afford the cash up front for that $3,000 expense that $3,000 would be worth $30,000 after 30 years. Take your $3,000 expense withdrawal at retirement and you still have $27,000 left over! That’s the power of compounding!
Not everyone will be in a position to take on that large of an expense, so obviously this won’t be helpful for everyone, but it’s still worth a consideration.
Final Thoughts
There’s a lot of flexibility with these accounts, and if you have a high-deductible health plan you should absolutely be funding an HSA alongside it.
Think of it this way. Best case scenario: you use the HSA retirement account exactly as intended and enjoy decades of tax-free growth and tax-free medical withdrawals. Worst case scenario (actually really best-case because it means you really didn’t need to use it for medical expenses): it eventually behaves the same way as an IRA. You really can’t go wrong.
Bottom line? If you have a high-deductible health plan you should definitely have an HSA.
Sources: https://www.opm.gov/healthcare-insurance/healthcare/health-savings-accounts/
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