The Investment Scientist

HSA: Best Retirement Saving Vehicle?

Posted on: September 3, 2018

Health-Savings-Account-Speedometer.gifJust this week I get an email from a client of mine asking me if she should contribute to her HSA (health saving account) and if so, how much. So I thought this would be a good time to talk about HSAs.

What is a HSA?

A HSA is a tax-advantaged savings account for health care purposes for folks who enroll in a qualified high-deductible health plan (HDHP.)

HSAs were brought about by President George W. Bush in the same legislation that added prescription drug benefits to Medicare. It was established without much fanfare because at the time all the sound and fury was about the prescription drug benefit. Little did we know that one and a half decades later, it would be becoming more and more popular in the corporate health insurance marketplace.

How does it work?

If you are enrolled in a qualified HDHP, you can make a tax-deductible contribution of up to $6900 to a HSA for your family (or half of that as individual.) If you are over 55, there is a $1000 catch-up contribution.

The money in a HSA can be used for all qualified medical expenses including dental, vision, health and long-term care. Even premium payments for health and long-term care insurances are qualified.

Why it is the best saving vehicle?

HSA is the only saving vehicle that get triple tax benefits:

  1. Tax deductibility on the front end.
  2. Tax free growth in the middle
  3. Tax free withdrawal for qualified expenses on the back end.

Most other tax-advantaged saving vehicles like IRAs, Roth IRAs and 401ks only get two out of the three tax benefits.

On top of that, the hurdle of qualified medical expenses is not hard to meet. As we grow older, we spend more on dental, vision, health and long-term care. This is a given. The average couple retiring at 65 will spend $280k on healthcare, even with Medicare.

If a couple starts saving $6900 each year to their HSA when they turn 40 and increases their savings to $7900 when they turn 55, by the time they get to 65, assuming a moderate 7% return, they will have nearly half a million dollars of tax free money they can use for their old age health care. Isn’t this great?!

(Feel free to share if you find it insightful.)

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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