Today, we’re talking about one of my favorite accounts, the HSA or Health Savings Account.
First, let’s talk about the Health Savings Account or HSA. Created back in 2003, these are savings accounts that work in conjunction with a high deductible health plan that allows you – the investor – to make contributions to the savings plan, and not only get a tax deduction, but invest the money inside your Health Savings Account. The gains are completely tax-free, and they can be used to pay for qualified out-of-pocket health expenses.
Here are the qualifying criteria to have an HSA:
- Having an HDHP or high deductible health plan. Call your health insurance provider, ask them if your health insurance is HSA compatible and if they say yes, you’re almost good to go.
- You cannot be a dependent on someone else’s tax return.
- You can’t be currently on Medicare.
You can have an HSA set up and invest it prior to getting on Medicare, but once you elect to go on Medicare, then you can make no further contributions at that time.
The Benefits of an HSA.
First, the HSA has some of the most tax-advantaged benefits of any account that we administer at NuView – and any account that I’ve seen outside of NuView.
When you have the HSA set up, dollar for dollar you get tax deductions when you make contributions to your Health Savings Account. Just by taking money out of your pocket and putting it into the savings plan, you immediately get to write that off as a tax deduction.
What you can invest in…
First let’s discuss the contributions that you can put into a health savings plan.
If we’re talking about 2021 contributions, it’s based on who is covered on your insurance policy.
If you have what’s called a single plan, or it’s just you covered under your insurance, then you can make a maximum contribution of $3,600.
If you are above the age of 55, you’re allowed to put an extra $1,000, bringing you to a total of $4,600, fully tax-deductible.
If you’re on a family plan – that means your insurance covers you and another person (it could be a spouse or a child). You can put up to $7,200, and again this is fully tax-deductible.
And if you’re above 55, you can add an extra $1000 as a catch-up contribution, bringing the grand total to $8,200.
The second advantage you get when it comes to taxation is you can invest your HSA. You would be shocked to know how many people don’t know this. They just use the savings account to get the tax deduction, and leave the cash in there, but they don’t actually invest the money.
Another great benefit with an HSA is you can invest in anything that you can invest in with an IRA. This includes stocks, cryptocurrency, and even alternative assets like real estate, promissory notes, investments into private companies, private stock, oil and gas.
The investment options are as limitless as your IRA options. So, when it comes to investing, taking control of your investments within an HSA can give your savings account tremendous returns in a tax-advantaged way.
The third benefit is that when you take distributions out of the Health Savings Account provider, using those distributions to pay for qualified out-of-pocket health expenses, it comes out completely tax-free. So, it’s:
- Tax-free going in via the deduction.
- Tax-free as you invest it because you pay no capital gains as you buy and sell things.
- Tax-free coming out as you pay for qualified out-of-pocket health expenses.
An HSA is not an FSA.
Another great benefit to this account is that it’s not a “use it or lose it” account. It’s often confused with the “use it or lose it” account, referring to the flexible spending account. That account works very differently than the HSA.
As some of you might know, in an FSA or flexible spending account, you put money in and if you don’t use it by the end of the year, you lose that money. That sounds the opposite of flexible to us. The Health Savings Account doesn’t work like that at all. You can invest and reinvest the money without losing it on an annual basis.
Here’s another cool thing. Provided you have the HDHP in place and the Health Savings Account active, you could leave your capital in the HSA and continue to invest it, compounding on itself.
Provided that you take money out to reimburse yourself for a qualified health expense while you have the HDHP and health savings plan in place, you can just reimburse yourself at a later point with expenses that you’ve paid out of pocket.
The Eighth Wonder of the World.
Einstein called compounding interest the eighth wonder of the world. You can continue to invest and re-invest your HSA. Continue to put contributions in, tax deductible, every single year and just leave the money growing.
In the meantime, you’re paying for health expenses out of your pocket. Then 10 or 20 years down the road, just take a big distribution on the HSA and pay yourself back. There’s no other account that does that.
So many benefits, and I’ve got one more benefit for you as well that even financial advisors miss sometimes.
One time in your life, you can fund your HSA with a tax-free transfer from one of your traditional IRAs.
Wow! Did that go over your head?
Let me repeat that. You can fund your HSA with a transfer from a traditional IRA, like a SEP or a traditional or even a simple.
What that means is you have the ability to take money out of a traditional IRA. With a traditional IRA, you’re taxed when you take it out, and penalized if you take it out before the age of 59 and a half. With an HSA – for one time in your life – you can move money (up to the contribution limit for the year) over to your Health Savings Account. When you take it out of your Health Savings Account, if it’s being used to fund a out-of-pocket health expense, it comes out tax-free and penalty-free.
The ability to do that enables you to take money out of a taxable account and move it over to an account that you can use today, that you’re not penalized for using early or taxed on.
How do you invest in an HSA?
Well, you can invest in an HSA just like you would with a Roth IRA, traditional IRA or SEP IRA. You can invest in stocks, mutual funds, cryptocurrency, or alternative assets. At NuView, we have an HSA that will let you do all three.
What we often see some of our investors do is partnering their Health Savings Account along with their Roth IRA, their spouse’s Roth IRA, and even their kids’ Education Savings Accounts on investments like real estate or promissory notes. When they earn a return on those investments, the profit comes back pro-rata and goes back to the different accounts that fit different purposes.
- The portion of the money put up by your Roth IRAs or traditional IRAs goes to your retirement bucket.
- The portion that you put up from your Health Savings Account, the profit that comes back can immediately fund your healthcare needs.
- And the money that’s partnered to the ESA goes to feed your education expenses for your kids or your grandkids.
If you’re utilizing all these tax-exempt buckets that we have here at NuView Trust Company, you’ll find that not only can you save for retirement faster, but you can pay for current expenses and consume current goods with tax-free dollars.
That’s the way the rich get wealthy. It’s by understanding how to properly use their money in different buckets so that they manage taxes efficiently.
If you are interested in establishing your own Health Savings Account that can be self-directed, contact us.
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