Want to retire early? Have you thought about an HSA?
What is an HSA
An HSA is a health savings account. It is your account with your money in it. The money that you contribute to your HSA is pretax. This can lower your taxable income and therefore make you eligible for lower taxes. So either a larger refund or a smaller amount owed.
Every year, the IRS sets the maximums that you can contribute to your HSA depending upon whether you contribute as an individual or a family.
HSAs offer what’s known as a triple tax advantage. We’ve already covered one of the three tax advantages which is that your contributions are pretax therefore lowering your taxable income.
As stated, an HSA is just a type of bank account. However, these accounts are interest bearing. The interest accrued by your account is also not taxable.
And number three of the triple tax advantage is that as long as you use the funds for qualified medical expenses, the money you withdraw will not be taxed or penalized.
What is an HDHP
So, if this sounds good and you want to utilize an HSA, how do you do it? Well first you need to enroll in a plan that offers an HDHP.
Like with your HSA contributions, every year the IRS sets a minimum deductible for your plan to be considered a HDHP.
An HDHP is a high deductible health plan, which is exactly what it sounds like. Your employer may offer you a high deductible health plan with an HSA. In these cases, employers may often even contribute to the HSA themselves.
Think of it like an extra little bonus!
They’re probably saving money on these types of plans because higher deductibles tend to have a lower premiums.
There is an inverse relationship between premiums and deductibles. Plans with higher deductibles tend to have lower monthly premiums.
And since under the ACA, employers with more than 50 FTE are required to provide affordable health insurance and contribute towards at least 50% of the premium a high deductible health plan can actually save your employer a lot of money.
If you are self employed or work for smaller company, you can also get a marketplace plan.
You should know, HDHPs although possibly a great way to save and even make money in the case of an HSA are not ideal for everyone.
You are actually best served by an HDHP if you are someone with very basic, limited medical needs or extremely large medical needs.
Someone with basic medical needs should still be able to use their insurance for preventive services, prescriptions, and check ups and will likely never meet their deductible. However, these basic service would usually be covered anyway.
Someone with extreme medical needs would likely meet their deductible very quickly and then be able to enjoy a low monthly premium.
If you fall somewhere in between, an HDHP may not be for you. Even though HSAs may be appealing, make sure that an HDHP will truly serve your expected medical needs for the year. Also, HDHPs are usually not ideal for people with smaller and more illness prone children!
How to Maximize Your HSA
We’ve already covered the triple tax advantage, which is great but probably not going to help you retire early all by itself. But, did you know that you can actually invest certain portion of your HSA? And any earnings on those investments are tax free.
If you max out on your HSA contribution and invest wisely, it is likely you could achieve a very large retirement fund.
If you are using your HSA really as a wealth building tool, you don’t have to pull money from it to pay for medical expenses. Instead, let it roll over from year to year. Invest wisely and let that interest accrue. That money will be waiting there for you when you turn 65 because at that point the account will convert to a basic retirement account.
And if you are lucky enough to retire early, you can let it continue to grow or use it for medical expenses.
Jesse Smedley is the Principal Broker for iHealthBrokers and the founder, president, and CEO of Smedley Insurance Group, Inc. and iHealthBrokers.com. Since the inception of SIG in 2007, Jesse has been dedicated to helping people save money on their health insurance by providing them with resources to educate themselves on all their health insurance options, both under age 65 and Medicare beneficiaries. He is featured in many publications as well as writes regularly for expert columns regarding health insurance and Medicare.
