Why your HSA = Retirement Account + awesomeness

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If you’re maxing out your retirement options or are restricted because of your income and are on a high deductible health care plan with an HSA, you need to start using it as a retirement account.

At the point you are maxing out your 401k, IRA, or SEP accounts.  If you have an HSA, you have another option for tax preferred growth in an account.  Turn to your HSA and start maxing that out as well.  If you’re single you can put $3350 this year (2015) into an HSA ($6650 for couples/families… plus add $1k if you’re over 55).  If you’re already maxing out your 401k, IRA, and other plans, then you are obviously into the stage of life where you’re building wealth.  If this is the case, you need to start paying for all your health care via cash flow and start using the HSA as a retirement plan.

The HSA can act as a 401k or IRA for you. At first, you are stuck with a horrible return on your money like a savings account…. up until you’re allowed to invest it in mutual funds.  The amount is different depending on what bank holds your account, but expect it to be in the $2000-2500 range.  They might require a minimum amount to be liquid as well, so check with your bank and see what the deal is.  Just like a 401k or IRA, your money gets to grow tax deferred.  If you had an emergency and can’t cash flow the expenses, you could use it tax free for qualified medical expenses.

I would suggest you avoid every using it if at all possible.  Using it is like taking a 401k loan, you disconnect that money from tax deferred growth, but you can’t even put it back because you’re limited on the contribution each year.  You’re much better off cash flowing any emergency by having a solid 3-6 month emergency fund.  Obviously, there’s some situations where it’s a matter of life or death and you absolutely have to use it for experimental treatments.  At that point, penalties, 401k’s, IRA’s, savings accounts, none of it matters… if you’re not alive, everything is useless.

If you can cash flow your medical expenses, you gain an additional retirement account.  The beauty of this account is that when you turn 65 you have more choices than with an IRA or 401k.  You can withdrawal 100% of it, pay your income tax (since it was pre-tax money like an IRA) and go buy a yacht for all they care. But! You could leave it in there and continue to compound your returns because there is no mandatory distribution like a 401k or IRA.  You can leave it in there until you die!

Personally I view my 401k and IRA accounts as fun money on top of normal passive income that I’ll have as I approach 60+ years old.  My HSA is one way I’m going to change the legacy of my family and pass on an enormous amount of wealth to my nephew and hopefully one day my own children (if I have them).  As a backup, it will act as a safety net in case I have to spend 20+ years in a nursing home with Alzheimers… because seriously if you’re in the 20-40 year old bracket and are investing and saving money with 401k’s and IRA’s… you’re going to be considered part of the “1%” and you’re probably not going to get any of the money you were forced to “invest” into social security.

Make the mental shift, look at your HSA as a family legacy account or a retirement account.  Stop using it for medical expenses today when you’re 20, 30, or even 40 years old and let it grow.  Go buy a yacht or a private plane with that money when you’re 65!

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2 Comments on "Why your HSA = Retirement Account + awesomeness"

  1. Gee. If you have an HSA with a high deductible and kids in college, how do you avoid using it?

    • I realize most parents want to help their kids through college and believe me, I know the struggles of being the recent grad drowning in debt (graduated with >$120k in student loans with only a Bachelors). It’s not evil for kids to work to help themselves through college, the research shows they actually get better grades if they work. There are plenty of students out there who are putting themselves through college with no help from their parents. If you can help that’s great, but not everyone can or should. You have to consider the long term for yourself (and your children). Does helping put your children through college at the expense of saving for your retirement and health care needs mean they are now forever in your debt as you get older?

      But, life and finances can’t be looked at in isolation. By the time you start to view your HSA as a retirement account you should already be maxing out whatever other retirement options you have (IRA/401k/403b/TSP/SEP). In all honesty, and at the risk of coming across as mean, if you’re not maxing them out yet then this post isn’t really intended for you… YET 🙂

      If you’re not able to max those out, then use the HSA to avoid taxes the way it was designed. If I was unable to max out my other options, I would absolutely use the HSA before I used a FSA though, at least the HSA I get to keep my money if I miscalculate my expenses for the year. If I had to use my employer’s contribution to the HSA to get by month to month, I would start by looking at the basics: reducing my set monthly costs, getting on budget, increasing my income, and eliminating any debt I had. I have been there and that was exactly what I did.

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