What is a Health Savings Account?

If I were President for the day, I would make everyone eligible for a health savings account. I even considered naming my daughter HSA to reflect my love for this investment account (that I don’t have access to, thanks Army).

The health savings account (HSA) is a tax-advantaged investment account designed to help people with high-deductible health plans save money for qualified medical expenses before taxes.

Roughly a third of private-sector employees have access to an HSA. If that includes you, I’m happy for you. If not, nag your employer until they either fire you or offer a HSA.

HSAs have no required minimum distributions, meaning you can keep your money in the HSA for as long as you want with no required withdrawals. In 2024, annual contribution limits are $4,150 for an individual and $8,300 for families. Investors age 55 and older can contribute an additional $1,000 of catch-up contributions to their HSA.

Withdrawing from an HSA for non-medical expenses before age 65 will result in a 20% penalty, and your money will be taxed as ordinary income. After age 65, your HSA essentially turns into a Traditional IRA. You can then withdraw HSA funds without penalty for any reason, but any non-medical expenses will still be taxed as ordinary income.

You may be thinking, “what’s the big deal? Lots of investment accounts are tax-advantaged.” True, but none do what the HSA does. The HSA isn’t designed to be a retirement account, but it happens to be the most tax-advantageous investment account there is.

HSAs are triple-tax advantaged, unlike any other investment account. Contributions to an HSA are tax-deductible like a Traditional IRA or 401(k). You can invest HSA contributions in stocks, bonds, or mutual funds, with your selection varying based on what your HSA provider offers. Contributions and capital gains grow tax-free, and if spent on a qualified medical expense, can be withdrawn at any time without penalty or taxes, regardless of your age. “Qualified” medical expenses include copays, prescriptions, dental care, contacts and eyeglasses, bandages, x-rays, and much more.

To sum up the triple-tax advantage:

1. You don’t pay taxes on your money going in. 

2. You don’t pay taxes on your money as it grows. 

3. You don’t pay taxes on your money when you withdraw it for qualified expenses. 

The HSA is the hybrid of the Roth and Traditional IRA.

Here’s a pretty detailed diagram from the IRS explaining the HSA’s tax savings, for the visual learners out there.

But here’s the gamechanger of the HSA.

The following statement may sound counter-intuitive to the purpose of the HSA but hear me out… don't spend your HSA on medical expenses.

Although the HSA is designed to be used for medical expenses, you can instead use it as a retirement savings account with a bit of record-keeping and organization. With an HSA, you aren't required to withdraw money for medical expenses when the expense occurs. You can instead withdraw that money later. Let's look at an example of how this can benefit you.

Let's say you pay for a $100 medical expense out of pocket. If you hold onto your receipt from that expense, you can withdraw $100 from your HSA at any time in the future without penalty since that withdrawal covers a qualified medical expense. Extrapolate this process to multiple medical expenses over time totaling thousands of dollars, and you have thousands of dollars available for you to withdraw without penalty whenever you want.

The IRS HATES this one SIMPLE trick!!!

Why would you do this? Well, the more your pre-tax money can grow tax-free and eventually be withdrawn tax-free, the better your net worth will be. If you’re able to cover medical expenses without using your HSA, your HSA can keep growing and eventually becomes another IRA after you hit 65.

A common tactic used by HSA owners is to keep digital records of all medical expense receipts on an online file-sharing platform, like Google Drive or Dropbox, so you don't have to remember where you stashed those receipts from ten years ago. If you’re a Boomer, send me an email and I’ll help you set up your Google Drive account.

If you are eligible to contribute to an HSA, take advantage of it.

P.S. – This has nothing to do with an HSA, but I’m under my union-mandated 1,000 word limit so I wanted to take a moment to address a common misunderstanding that annoys me.

I’ve seen a LOT of people on social media say something along the lines of “iF InFlAtiON iS gOinG DowN, tHeN WHy iS my gROCeRy BilL StILl sO hIGh???”

When the rate of inflation decreases, that means the general price of things is still increasing, but at a slower rate.

Here’s a bad example to illustrate the point: If your box of Captain Crunch Berries went up 10 cents two months ago and only 2 cents last month, the price “inflated” at a slower rate.

If the cost of groceries goes down, that would be an example of deflation. Deflation isn’t good for the economy either, because people tend to hoard money to buy things for cheaper, later.

So when your Aunt Karen rants about inflation and grocery prices at your next family gathering, you can proudly (obnoxiously) explain inflation to her.

Knowledge is power.

Call to Action

Ask your employer if you’re eligible to open an HSA. If so, run (don’t walk) to go open one ASAP.

What We’re Reading/Watching/Listening To:

Selling Sunset on Netflix. If you aren’t familiar, Selling Sunset is peak trash television. I’ve come to the conclusion that Jason and Brett are the two worst managers on the face of the planet. Their realtors run rampant and make fools of themselves daily, and they don’t have a care in the world about it.

Debrief on Deck

Next week, Wilson will dive into the world of options trading. Here’s ChatGPT’s abbreviated description of options trading:

Imagine you and your friend are playing a game where you have a toy car (a stock), and you think it might become more popular soon. You have a special ticket (the option) that lets you buy the toy car at today’s price, even if it becomes more valuable later… So, options trading is like playing a game with special tickets where you try to guess what will happen to something's value in the future.

Well done, ChatGPT.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (X (formerly Twitter) and Instagram).

Until then, stay the course.

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