A Secret Wealth Builder: Health Savings Accounts

When people think about building a nice nest egg, creating a Health Savings Account is not the first thing that comes to mind. I find that a Health Savings Account, or HSA, is often an afterthought for a lot of people — if you’ve even heard about it. But an HSA is a really valuable tool for helping you to build wealth over time.

What is a Health Savings Account?

In short, an HSA is just like a 401k that you can open in your name. You must be on a high deductible health plan where your deductible is greater than $1,350. You can fund your HSA each year with up to $3,500 individually and $7,000 for a family (those are 2019 limits). If you’re 55 or older, that amount goes up to $4,500 individually and $8,000 with a family.

How do I qualify?

You just need to be on a health insurance plan with a high deductible. A high deductible means anything greater than $1,350 (see IRS rules here).

Why is a Health Savings Account so beneficial?

An HSA has huge tax benefits! Every dollar you put into a health savings account is tax-free. Your money grows without being taxed. And if you take it out later for health-related expenses, you don’t pay tax on it either. After you turn 65, if you decide to use the money for non-health related things, you only pay tax on the earnings with no penalty. So, an HSA is really unmatched in its tax efficiency and flexibility as a long term savings tool.

Do the math!

If you can sock away $3,500 a year into your HSA for 10 or 15 years, and you don’t touch it, eventually you’ll have at least $35-$50,000 in the account. But the other plus is that you can actually invest the money! Your HSA doesn’t have to sit in cash. If, through your investments, you earn 5% a year, then voilà! You’ll have $45-$75,000 in no time. At the very least, your HSA may help you feel more secure in knowing that you have an emergency fund should something terrible happen to your health.

What does it cost?

Well, nothing to set up. But the indirect cost is that you have to be on a high deductible plan. But, if you can afford to take that risk, in all likelihood your monthly premiums will be lower than the competing plan. In the end, an HSA will help offset the money you would put into the plan.

What else do you recommend I do with an HSA?

If you have the cash, I’d recommend actually funding your HSA each year to the maximum amount, not using the money, and letting it compound for you. Leaving your money alone may sound counter-intuitive since the HSA is there to be used; but if that compounded money is allowed to grow, you’d have plenty of money for healthcare when you’d likely need it the most: your golden years.

How can my healthcare choice build my wealth?

As you can see, putting some thought into which healthcare plan best fits you could save you thousands of dollars each year. And if you can put money into an HSA, you save thousands more on taxes. It’s not crazy to think that these simple choices could save you upwards of $2,000 a year or more. Over 10 years for a couple, for example, we’re talking about an extra $40,000 that you have at your disposal. And that’s nothing to sneeze at.