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The Awesomeness of HSA's

Way To Wealth


Way To Wealth


The Awesomeness of HSA's

Luke DeBoer, CFP®

So the H.S.A. is simply awesome. I don't know how to put it more appropriately. It's a tax-efficiency-tilted-planners dream vehicle. In fact, I would argue it should be 1(b) on your priority list on where to put your savings. 1(a) would be your 401(k)/403(b) but only up to the match.

In fact, if your company doesn’t have a match it is not ridiculous to say that you should seek to max out your H.S.A. ($3,400 for single person HDHP and $6,750 for +1 HDHP - those numbers are inclusive of company contributions, by the way) before funding any other account, assuming you’re able to invest the dollars in said H.S.A. In fact, H.S.A.’s are the single most tax-efficient savings vehicle that exists - with the possible exception of a Roth IRA contribution coupled with a Retirement Savings Tax Credit, if applicable.

So, let's cover the awesomely tax-efficient nature of the H.S.A.

When you put money in your H.S.A. you get what’s called an above-the-line deduction. For those scoring at home that is the best kind of deduction you can get. Keep in mind, there is a distinction of a deduction for AGI and a deduction from AGI. They are both good but the "for" is the better one. H.S.A. contributions fall into that category (various types of tax reducing items will likely a post in the future, so stay tuned). Anyhow, contributions reduce the amount of taxes you pay for the year you put money into the H.S.A.

It gets better. While you’re holding your dollars in the H.S.A. you do not pay taxes. So, hypothetically, you buy some stock and it goes wild and you have incredible gains and you then sell it. Well, no taxes on the gain, so long as it's still housed in the H.S.A.

It gets better. You won’t be taxed on the way out so long as you take the dollars out for a qualified medical expense. So income tax-free going in and income tax-free coming out.

It gets even better! When you save through your payroll deductions you also do not pay FICA taxes (7.65% as of this writing) on those contributions. You can’t say that about saving in any other vehicle. So even if all other things were equal (and they’re not), saving in an H.S.A. is an immediate relative gain of 7.65% over other savings vehicles!

Wait, don't go away, there's more.

The primary downfall of an H.S.A. is the penalty, a hefty 20%, for using it for purposes other than a qualified medical expense. However, that penalty goes away at age 65. Upon reaching age 65 though, we are allowed to use H.S.A. dollars for any purpose under the sun. However, there's a slight catch. If we use it for a qualified medical expense it is still tax-free but if we use it for some other purpose (vaca, for example) we avoid the penalty and pay the tax - taxed as ordinary income. That's really a very good deal though as in this sense it is really just a supercharged IRA or pre-tax 401(k) in that it’s tax-free on the way in and taxed on the way out, except we didn’t pay FICA taxes upfront and we still get the tax-free medical expense qualification.

Really, saving for retirement in any of the available options is about taxes, or at least choosing to save in one vehicle over another is about taxes. H.S.A.'s are the most tax-efficient of them all. And so this is is one of those items in financial planning that you can take to the bank. It's not a gray issue. If you have access to an H.S.A. you should absolutely seek to max it out, almost before putting money anywhere else. 

That's the H.S.A., it trumps them all. Use it. 

***Quick note: 

  1. The application above only applies if you actually have access to an H.S.A. You shouldn't switch your health insurance JUST to get access to an H.S.A. More variables must be inserted into the decision making process. However, if you decide to use a high-deductible health plan...well...I'm glad you're here reading this.

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