A Health Savings Account (HSA) can be a vehicle to grow your Net Worth. I first started using my HSA as an investment around 2016 and I wish I had known about this sooner to give my money more time to grow. Let this be a lesson and public service announcement! Check out the Table of Contents for the key bullet points. Let’s jam!
Contributions are Pre-Tax
The money you put into your HSA is pre-tax money. Pay for your medical expenses with that money and that means you didn’t pay tax on that money.
At the very least, don’t pay taxes on your medical expenses. If you take no other action than this, let this be the one action that you do take. Make your hard-earned money stretch further.
Growth is Tax Deferred
The money in your HSA grows with deferred tax. If you are using your money for medical expenses, you still don’t pay tax on it, but this is important if you want to use the money for non-medical reasons. I’ll talk more about that in a moment.
Direct your HSA Investments like a brokerage account
If you have a decent custodian handling your HSA, they may treat the account as a normal brokerage account. That means that you have full control over how money in the HSA account is invested, or not! You could just let your money sit there and treat it like a savings account, especially with increased savings rates (as of 2023). Or you could invest your money just like any other brokerage account buying and selling stocks, mutual funds, and even stock options.
Withdraw with no tax to pay for medical expenses
When you use funds from your HSA for medical expenses, you do not pay tax on that money. This is easily 15%+ less burden on your finances by using HSA funds for medical reasons.
No time limit on reimbursing yourself for medical expenses
Aha! This is the little-known secret. As it stands today, 2023, there is no restriction on how long you wait to reimburse yourself for medical expenses. This is a big deal! Since 2016, I have maxed my HSA contributions, and get a small match from my employer. And since 2016, I also do NOT use my HSA to pay for medical expenses and instead keep a running log and folder of receipts.
Why wait to reimburse yourself? Recall that your contributions were pre-tax, and your growth is tax deferred, meaning it grows tax-free. That means that an HSA works very similarly to a Roth IRA, with the caveat that this is true only when used for medical expenses. You keep control of more of your money in a tax-advantaged account.
Withdraw for Any Reason at Age 65
When you reach age 65, you can withdraw your funds for any reason, and it does not need to be for medical expenses. Want to buy a new sports car? I wouldn’t recommend that personally, but you could withdraw your HSA and buy your new beamer.
You will pay taxes on withdraws if you use the money for non-medical expenses, but the point is that more of your money has gone into this tax-advantaged account. Not only that, but your money has grown without the drag of taxes over years and years before you reach age 65. This is powerful and let’s compounding work in your favor.
My Strategy of Using my HSA as an early retirement investment vehicle
Let’s sum up how I use my HSA as an investment vehicle to support my FIRE plans.
First, I max out my HSA contributions, and receive a small employer matching contribution. This is pre-tax money, and I’m not leaving any money on the table with my employer.
Second, I do not use my HSA to pay for medical expenses, and instead leave the money in the HSA to compound and grow. I use a simple excel file to track my expenses with the plan to reimburse myself at some date in the future without penalty. And I keep all my HSA reimbursement eligible receipts in a folder right next to the excel file. You can download my HSA Reimbursement Tracker Excel file here.
Last, keep abreast of any changes to the rules around HSA. As I write this in 2023, there is no limit to how long you can reimburse yourself for medical eligible medical expenses. However, this is no guarantee in the future and the US Congress may change this. I think that would be a stupid move, but any level of stupidity from our elected representatives seems possible.
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