My wife and I have had a high deductible health insurance plan for the last ten years. We squandered an amazing opportunity until about a year ago. We never put much into our HSA since the bank paid a .0000000001% interest rate on it. When we first opened it, we used to put about $40 a month into it. We rarely spent money on health care, so we just put in enough to cover any health care expenses that year. With such a low-interest rate, it didn’t make any sense for us to contribute more.
Learning About the HSA
The great thing about your HSA is you put money into the account before you pay your taxes. You then pay your qualified health care expenses with your tax-free money. Most employers transfer your funds to a bank that does not allow you to invest. After spending six months playing phone tag with the right people at the bank, they told me it is too expensive to allow people to invest their own money. (They would prefer to make money on us by loaning out our money and paying us almost nothing.) I began looking to see what my other options were. I found out you can transfer your funds out of the bank and to Fidelity.
My wife’s workplace transfers the HSA to the local bank. I then transfer the funds out each month to a Fidelity account. Fidelity will allow you to invest your HSA in whatever you want. I encourage you to invest in index funds. However, if you wish to purchase individual companies, it is an option. The maximum you can contribute in 2021 to your HSA is $3,600 for an individual or $7,200 for a family.
Review of Tax-Advantaged Accounts
Let’s do a quick review of your main options for tax-advantaged accounts. A 401k is tax-deferred; you don’t pay taxes now; you pay them when you withdrawal from your account. The Roth IRA is after-tax; you pay taxes now and will not have to pay taxes when you withdrawal. The HSA, you never pay taxes on it. It might even be your best retirement account, and you didn’t realize it.
You also can use your HSA for medicare premiums: https://www.kiplinger.com/article/spending/t027-c001-s001-health-savings-accounts-after-medicare.html
What happens if you put too much money into your HSA and don’t need it for health care? If you have too much money saved at the age of 65, your HSA can turn into a retirement account that you are taxed on when you withdrawal. The withdrawals will work the same way your 401k does.
Save Your Receipts & Withdraw Later
You have an excellent opportunity to invest money that you don’t pay taxes on upfront, and if you need it for your health care, you never will pay taxes on it. Hopefully, you don’t need it and can use it for a retirement fund. I don’t think health care will be any cheaper 20 years from now. I am looking forward to having tax-free money to pay for any expenses.
We currently save our entire HSA and invest it. If we have a medical expense, we cover it from our savings; this allows us to boost the total in our HSA. I also save copies of the receipts that are qualified expenses. This way, at any point, if I wanted to, I could withdrawal that amount from our HSA.
If you do not have at least a three-month emergency fund saved up, please leave enough money in your HSA without investing it so that you can cover a considerable medical expense without selling your investments.
Here is a link to Fidelity’s HSA. It was effortless to set up. It took a few weeks for the paperwork to go thru but was hassle-free. https://www.fidelity.com/go/hsa/why-hsa
Start today with your Retirement Savings – Interesting Dollar