Meet the HSA: Your Triple Tax Advantaged Unicorn

Open enrollment is almost here! If this news doesn’t make you feel like a kid at your own birthday party, you might be missing out. I sure was. And then I discovered some key facts that NO ONE was talking about, and voila! Open enrollment became as exciting as cashing in those credit card miles for a free vacation. Here’s why…

Open enrollment became as exciting as cashing in those credit card miles for a free vacation. Here’s why…

In my district we have the option to enroll in an HSA or FSA plan every year. (HSA: Health Savings Account, FSA: Flexible spending account, often called a FLEX account.) I did the FLEX option for years, and when HSAs became an option about a decade ago, I switched over. I didn’t really know WHY I made the switch, except that I could roll the leftover balance of my HSA over each year and couldn’t do that with a FLEX account. I was really confused about what an HSA even was. Someone somewhere along the line mentioned that you could invest the money in your HSA, but I never heard anything else about it, teaching swallowed all of my extra time, and before I knew it I’d missed out on a decade of investing. Argh!! Don’t let that happen to you! Keep reading!! 

Here’s the scoop on why an HSA could be your new BFF: 

  • You can contribute up to $7,100 to your HSA family plan and $3,550 for individual coverage. (As of 2020.) People over 55 can put in an additional $1,000.
  • You can roll your HSA balance over to the next year.
  • If you switch school districts your HSA money can move with you.
  • HSAs can cover everything from band-aids to parking fees for medical appointments. The list is huge! Take a look at this link to see what’s covered.
  • Contributions to your HSA are pre-tax, and thus lower the taxes you pay for the year.
  • You can invest your HSA funds in the stock market.
  • You can withdraw your HSA funds for medical expenses at ANY time tax-free.
  • You can withdraw your HSA funds for ANY reason after age 65, and there are NO required minimum distributions. This means that although you’ll pay taxes on withdrawals that aren’t for medical reimbursements, you can control how much you take out and thus control your taxable income and your tax rate.

Check out those last four again. That’s right. An HSA is triple-tax advantaged. A unicorn in the world of retirement accounts. You don’t pay taxes on the money that you put in, on the money that you earn, or when you take the money out to reimburse yourself for medical expenses. And after age 65, you can take the money out for whatever you’d like–it doesn’t have to be for medical expenses (although if the money you take out isn’t medically related, you’ll pay your normal tax rate). Getting excited yet? Here are some real-life scenarios…

You can put money into your HSA today and pay for medical expenses out-of-pocket. In the meantime your HSA funds live in the stock market and make more money for you for as long as you’d like. Then you can reimburse yourself at any time for any qualified medical expense. If you’re 50 and need a little extra cash, just reimburse yourself for those contact lenses you bought when you were 25. All you have to do is request the reimbursement from your HSA plan. Save all of your medical receipts in a file in case the IRS asks for proof, but it’s otherwise literally that easy. Can you see the unicorn galloping across the meadow yet? 

Imagine you invested $3,550 a year in your HSA. Let’s say it grows at a conservative 6% for 30 years. Your $106,500 investment would earn you $205,500 for a total of $312,000. A $7,100 a year contribution would bring you a total of $623,000. And even if you’re able to contribute just $1,000 a year, you’d still end up with $88,000. None of that is small potatoes, especially when you consider that you will never pay taxes on what you use for medical reimbursement. (Now look back at the list of what you can get reimbursed for–it could really add up over 30 years!)

That said, there are a few reasons why an HSA might not work for you. Here’s the rundown: 

HSAs are only an option for high-deductible healthcare plans (HDHPs). Your district might not offer a high deductible plan, or you may not want to pay a higher deductible. Keep in mind you can always reimburse yourself for any medical expense at any time, though, including expenses that happen before you meet your deductible. 

You can only spend money that you have actually contributed to your HSA. So if you start with an $83 contribution in January and need $500 for a medical expense, you’ll be out of luck. A FLEX account works differently–you can get reimbursed for your scheduled annual contributions before the money is actually taken from your paycheck. This downside can be offset by rolling over your HSA savings from year to year, thus allowing you to build a cushion in case you have an unexpected expense. 

If you have high medical expenses and can’t pay out-of-pocket, then you won’t have as much to invest. But an HSA may still be a good option because you’ll never lose money that you don’t spend, and then you can always invest what’s left whenever you have some breathing room. 

If you need to cover childcare or other dependent care expenses, then a dependent care FSA might be the best choice for you. HSAs only cover medical and medically-related expenses. 

If your district offers an HSA but does not restrict you to a plan administrator, check out this article for a quick read on which providers offer the best perks. As with any investment, fees matter! So do a bit of research to find the best fit for you. Once you get your account set up and start to choose investments, check out this article on index funds to help you choose some good ones.

If you’d like this info in a fantastic podcast format, check out ChooseFI episode 102R.

Know a teacher friend who needs to meet the HSA? I’d be so happy if you shared this article with them. And don’t forget to subscribe so you never miss a post. Thanks so much for reading!