The question, should I spend or invest my HSA contributions has been asked dozens of times over the years. Analysts, fund managers and other financial bloggers have answered both arguments of the question. Everyone has an opinion on the pros and cons but very few people are sharing their decision making on their personal HSA contributions. So, I decided, instead, to share with you what my family and I are doing with our Health Savings Account.
What is a HSA Health Savings Account?
According to Investopedia, A Health Savings Account (HSA) is an account created for individuals who are covered under high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover. Contributions are made into the account by the individual or the individual’s employer and are limited to a maximum amount each year. The contributions are invested over time and can be used to pay for qualified medical expenses, which include most medical care such as dental, vision and over-the-counter drugs.
Why We Have a HSA
For years my wife’s company had a FSA flexible spending account. However, 2 years ago they decided to switch to a HSA and we have been contributing to it ever since. We don’t over fund it or max it out but we do take advantage of the benefits of having it. Luckily my wife’s company made that change because we calculated that we lost $1700 of unused flexible spending money over a 2 year period.
Please don’t get me wrong, I am not complaining nor do I regret that we aren’t at the doctor’s office more often but losing $1700 is not something I am proud of.
HSA Contributions: What I learned
After condensing multiple accounts at the end of 2016 and starting a new millionaire challenge I craved to tighten up our budget and fully understand exactly where ALL our money was going.
I am on top of all of our income and expenditures but I didn’t really know much about our HSA contributions. I understood the textbook definition of a HSA but not the full benefits. Fortunately we are in relatively good health and don’t need to use it much.
With that said, I dug a little deeper and learned a great deal about Health Savings Accounts and what the true benefits are.
One of the main benefits of contributing to a health savings account is it offers a continual way to save for and pay for healthcare expenses without losing the unused money. Obviously if you are sick or constantly at the doctor’s office you are going to want to spend your HSA contributions to offset the high deductible and high cost of health care. However, if you don’t need to use it or don’t mind spending your taxable income on health care costs then investing your HSA has some very interesting benefits.
After reading and reviewing “The Simple Path to Wealth,” I discovered that my wife and I had much more flexibility with our HSA then I knew. Realizing we had the opportunity to invest our HSA contributions I highlighted some very important key points and shared them with my wife to see if she was in agreement.
HSA Contributions: The Beneficial Key Points
Below is the actual list which I sent my wife via email. The words “you” or “your” refer to her.
- HSA Contributions are tax deductible and because your employer contributes to it
as part of their health care plan it is free of social security and medicare tax
- We can withdraw the money to pay for qualified medical expenses
anytime. The money is tax and penalty free.
- Unlike our old Flexible Spending, unused money is carried forward yearly.
- If you predecease me I inherit the HSA with the same benefits.
- If we both should died then it reverts to ordinary income for our children.
- We are not required to pay our medical bills with HSA contributions and can
use our own money to pay out of pocket expenses.
- As long as we save our medical receipts we can withdraw money from
our HSA tax and penalty free… even years later.
- We can invest this money and let it grow if we choose.
- At 65 we can withdraw the money from the HSA and use it for
ANY purpose penalty free but we will have to pay the tax on it (like a
regular IRA) unless we are using it for medical expenses. (SAVE ALL MEDICAL RECEIPTS)
HSA Contributions: Why We Decided to Invest it
After reviewing the information and having a family discussion we decided to invest our HSA contributions leaving the mandatory $1000 balance in the account. We realized that we don’t spend a lot on medical expenses and we can afford to pay the higher than normal deductible out of pocket. In addition, we are also looking to financially benefit from not needing to use the HSA because of the tax free benefits.
If we do need to go to the doctor we will use our own taxable income (money) and save the receipts until we decide to deduct it from the HSA. Hopefully that money will continue to grow so that when the time comes to withdraw the money for those qualified medical expenses we can do so penalty and tax free.
The health care system is forever changing and both my wife and I recognize that at any time the rules and regulations of the HSA contributions can change too. That means that there might be a time when penalties and taxes play a part of withdrawing the money from the HSA. However, for now that is not the case and so we plan to maximize our money and invest our HSA until we no longer see the benefit of doing so.
In case you were wondering, we invested our Health Savings Account contributions in the Vanguard VFIAX 500 index fund. The fund is a low cost index fund which is a huge benefit but there is a $2 monthly charge to invest and maintain our HSA contributions.