The Health Savings Account (HSA) is a tax incentivized account you are allowed to use when you participate in the high deductible health plan. I’ve been using an HSA for 3 years now and I recently learned that I have a unique strategy when dealing with my HSA. Before I get into what is different about my HSA strategy I need to explain the details of the HSA first.
What makes an HSA special?
HSA’s allow you to contribute pretax money to an account and then remove the money tax free if it is spent on qualified medical expenses. The IRS publishes a complete list of what is allowed and what isn’t. All the info HERE. So the HSA is similar to the 401k in that you get to put money in before you are taxed and it is similar to a Roth IRA in that the money you take out of it is tax free. It is really the best of both worlds.
HSA’s are different from flexible spending accounts (FSA’s) in that with an HSA you keep any money left over at the end of the year and when you change employers you also keep the money. With FSA’s if you didn’t spend all the money in it your account by the end of the year it was gone for good. For this reason, HSA’s are a MUCH better deal than FSA’s.
One other notable difference between the two is that with HSA’s the money belongs to you immediately after it has been contributed regardless of whether you or your employer contributed, whereas with a FSA if you quit your job you lose out on the money in your FSA. The money in an HSA belongs to you and the money in an FSA belongs to your employer.
The money within an HSA can be invested in any stock, bond, or index fund of your choice.
My Unique Strategy
Many people just use their HSA as a way to get reimbursed for medical expenses at the time when those medical expenses occur. If you are doing this though you are missing an opportunity to keep money in your HSA. The money left in your HSA can grow tax free similarly to a Roth IRA.
In order for this strategy to be successful you have to be aware that the money can only be taken out of the HSA tax free if you have spent it on qualifying medical expenses. This seems like a relatively troublesome road block, but the IRS does not care when you spent the money on medical expenses (See Question 39 in this IRS bulletin for clarification). The is key to understanding the benefits of this strategy because you can spend money on medical expenses now and keep the receipt for them and down the road when your money has grown tax free for a long time you can turn those receipts into cash from your HSA.
Keep your money in your HSA, let it grow tax free. Save your medical receipts. This is the best retirement account there is because it combines the benefits of a 401k and a Roth IRA.