Health Savings Accounts | The only triple tax-advantaged account out there!

HSAs. Do you have one? Should you have one? Can you have one? Learn all about the tremendous triple tax advantaged nature of these accounts! Plus, they turn into retirement accounts after age 65!

Transcript:

Hi everyone, this is Nathan Donohue with Consilio Wealth Advisors. Today we're going to be discussing health savings accounts, HSAs, why we believe everybody should be using one if you're eligible.

Now first let's dive into what is an HSA. HSA stands for health savings accounts. These were developed back in 2003 as an account type to allow people with high deductible health plans save money to offset any potential out-of-pocket medical expenses that they might have as a result of being on a high deductible plan. Now these HSAs come with some tremendous tax benefits. It's one of the primary reasons why we are such big fans of the HSA.

There are three primary tax benefits that will cover. The first of which is that your contributions are tax deductible. They are made pre-tax so you can make a contribution to your HAS prior to having to pay ordinary income taxes. So for example, if you receive $100,000 of compensation and you make a $2,000 contribution to your HSA, you've now reduced your taxable income in that year from $100,000 down to $98,000. So depending upon your tax situation, your bracket, you can save yourself a considerable amount of money in taxes that year by deferring some of your income into the HSA.

The second primary benefit is that the growth and accumulation of the money in your HSA is tax deferred. So not only can I contribute cash into my HSA, in many cases, I can also invest all or a portion of those funds into a variety of different investments, which allows my HSA to grow and compound depending upon what I choose to invest in. And one of the great benefits is that as that money continues to grow and compound and I earn dividends and interest and experience gains, I don't have to pay any taxes whatsoever as that happens. All of those gains are tax-deferred. All of that money stays preserved inside of the HSA.

The third tax benefit that we really enjoy is that if you take a distribution from your HSA for qualified medical expenses, these are typically required medical expenses, vision, dental, what's oftentimes excluded might be any type of voluntary medical procedure, plastic surgery, for instance, but as long as it's made for an eligible and qualified medical expense, distributions from your HSA are tax-free. You don't have to pay any taxes on the distribution.

So again, three primary tax benefits. You have tax deductible contributions, tax deferred growth, and tax-free distributions. It's one of the rare cases where you get triple tax benefits, which is again why our firm is such a big fan of our clients using the HSA if they're eligible.

 All right, there are a couple other perks and benefits associated with HSAs, the first of which is that you can take penalty-free distributions after age 65. So prior to age 65, you have to take the money out for a qualified medical expense in order for it to be tax-free. If you take the money out for anything else, you'll have to pay taxes and you'll also have to pay a penalty. However, if you take the money out after age 65, those penalties are not waived.

So, you can, after age 65, still take the money out for qualified medical expenses. However, if you take it out for anything else, you will have to pay taxes on those distributions, but those penalties are now waived. You don't have to worry about paying penalties after age 65. So this is another great way to not only help save for any out-of-pocket medical expenses, but if fortunately you don't incur major medical expenses, you now have a wonderful tax-deferred account that you can use to supplement your retirement savings as well.

Another perk is that in some cases employers will make contributions to your HSA on your behalf. So if you sign up for a high deductible medical plan, in most cases that reduces the cost that your employer is having to pay on your behalf for that health insurance plan. And some employers will opt to reward those employees that choose that high deductible plan by making a contribution to their HSA on their behalf.

Another perk of the HSA that most folks we find are not familiar with is that you can go back and reimburse yourself for any medical expense down the line. So, from the time you open the HSA, any medical expense that you incur after that point in time, you can reimburse yourself for. So, let's say today I incur a $100 medical expense for going to the physician. I can pay for that out of cash today, leave the $100 in my HSA.

Growing on a tax-deferred basis, I'm continuing to take advantage of those tax benefits, continuing to allow that money to remain invested, remain invested in the market a year from now, five years from now, 10 years from now. As long as my HSA was open today or prior when I incurred that medical expense, and as long as I hang onto that receipt and that invoice for $100 from the doctor, I can reimburse myself at any point down the line. So, this is a great way we encourage folks to, if you can, if it's a small enough medical bill, just pay for it out of cash and leave the $100 in your HSA, continue to grow, take advantage of those tax benefits, take advantage of the compound growth by leaving your money invested.

So we'll wrap up with a couple of our top recommendations to get the most out of your HSA. First of which, max out your annual contribution limit if you can. Nothing beats a good savings rate.

Second of which is invest the funds. Makes sense to keep a certain amount of money in cash, but above a certain point, take advantage of some additional compounding and choose an investment portfolio that allow your HSA to grow and compound at a greater rate.

Third, if it permits with cashflow, pay for some of those small medical expenses out of cash, leave that money in your HSA, growing on a tax -deferred basis and compounding with the market.

Fourth, if you are going to do that, make sure you save your receipts, because you can go back in time at any point down the road and reimburse yourself for those medical expenses.

And then fifth, review your annual contribution limits. IRS changes how much you can contribute to these accounts all the time.

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