The investment hat trick: The health savings account (HSA)

Hats rodeoPhoto courtesy of David Ingram

When I started my new job, one of the items on my list was to sign up for an FSA (flexible spending account).

Now I’ve talked about the FSA before. An FSA is great, in that you can put money away pre-tax to be used for healthcare-related expenses, and really frustrating, because you need to predict with clairvoyance how much you’re likely to need during the upcoming year.

I’ve always had the option of using an FSA, for better or for worse. So it was with some surprise that I was told that my company doesn’t offer an FSA.

What? Why not?

The answer, as I later found out, is because I have the ability to sign up for a health savings account (HSA).

Which, as it turns out, appears to be superior in almost every way.

HSA basics

A health savings account (HSA) is a type of medical savings account, in that it can be populated with money that can be used for medical expenses.

(What’s a qualified medical expense? Here’s a short list.)

So far, it’s not very exciting. But it gets better.

Funds don’t expire at the end of the year. This is a big one for me. No more wandering the aisles at Walgreens at the end of the year, trying to figure out how many pairs of Dr. Scholl’s insoles you can buy without inviting ridicule.

So the money stays there, waiting for you to use it. Didn’t get to it this year? There’s always next year.

And unlike an FSA, which is usually tied to your employment, you own your own HSA. Move jobs? You can keep your HSA. Want to open a new HSA? Go for it. Want to transfer money between them? No prob.

And we’re not stopping yet. You can contribute to an HSA pre-tax, just like an FSA. You can either get a payroll deduction, just like your FSA, or you can contribute to an HSA and then get a tax-deduction when you file your taxes.

Not only can you contribute pre-tax, but your money can grow tax-free. You pay no interest on any earnings in your HSA.

Here’s the hat trick

So far this isn’t much different from a 401(k) or traditional IRA. Pre-tax contributions aren’t exactly unique.

But here is the best part: when used for qualified medical expenses, you can withdraw your money tax free too!

So with an HSA, you have a triple tax benefit: tax-free contributions, tax-free growth, and tax-free withdrawals.

That’s why I call the HSA an investing hat-trick. I’ve seen nowhere else where the average person can get a triple tax break.

A small catch

There’s a bit of a catch though.

In order to be eligible to open or contribute to an HSA, you need to have a very specific type of health insurance plan, called a “High Deductible Health Plan”, or HDHP.

The HDHP is defined in a very specific way: The plan must have a deductible of at least $1,300 (single) or $2,600 (family), with a maximum out-of pocket of $6,550 (single) or $13,100 (family).

Those numbers are for 2017, and are revised each year. This page should have the most updated rates if you’re reading this in the future.

So the catch is that your plan leans more to the “catastrophic coverage” type of plan.

Now this might turn people off, but I encourage you to look at the larger picture. You might have to pay more before your coverage kicks in, when compared to a lower-deductible plan, but with the ability to contribute to an account that grows tax-free, year after year, these savings can more than offset the initial out of pocket cost.

And remember: our general goal is to self-insure for the low-cost things, and get insurance for the larger things. I’d much rather have $1,300 in a savings account to use for my deductible each year, saving me on premiums, while still able to have coverage against the really big expenses.

New frontier

Since one can’t contribute to an FSA and an HSA at the same time, I’ve never had an HSA before, so it’s new to me. And it might be new to you too: my experience shows  that people tend to know even less about the HSA than they do about the FSA.

But I’m really excited about HSAs and their potential for savings, and there is so much more to say on this topic, so you’ll hear more about this. But if you have the option of signing up for an HSA, I would seriously consider it.

But enough about me. Do you have an HSA? What has your experience been?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

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Mike Pumphrey
Posted on October 16, 2017