Should I open a HSA?

What is a HSA?

Does your workplace offer HSA? I didn't know what HSA was until just a few years ago. My workplace started doing more awareness for different employee perks and retirement options. I attended a workplace seminar that presented these perks. HSA was one of the perks mentioned in that seminar. I was amazed at what the HSA does. HSA stands for a health savings account. The presenter kept saying that this is a great investment vehicle because you get triple tax advantages.

HSA has triple tax advantages because:

1) you contribute your money before tax deductions

2) your money grows tax free

3) you can withdraw your money tax free as long as they are qualified medical expenses

This sounds even better than the Roth IRA (my article about Roth IRA)!

Previously, I was only familiar with a FSA which is a flexible spending account. Unlike the HSA, you are not able to use that account an investment vehicle. The money in a HSA account can be carried over year to year. The money in a FSA account must be used by the end of that plan year or else you lose it! If your workplace offers either options, you should definitely look into both of those options. Depending on your situation, it might make sense to have a FSA account instead of a HSA account. For healthier individuals, having a HSA may make more sense since you most likely won't need spend as much on medical expenses. HSAs are offered only to employees that are enrolled in HDHPs (high deductible health plan). These health plans usually have a lower monthly premium but a higher annual out of pocket maximum.

Let's talk about the pros and cons of a HSA:

Pros:

1. Able to contribute pretax money to this account and invest the money into index funds or stocks and have it grow tax free.

2. Able to withdraw from the account at any time tax free as long as it is for a medical expense (save your medical receipts!) The receipts can be used at a later time. This means you can pay out of pocket for an expensive procedure now and withdraw money tax free from your HSA at a later point in time as long as you have the receipt for that expensive procedure. This lets your money in your HSA grow for a longer period of time.

Cons:

1. Low contribution limit. For a wonderful plan, there is however an annual maximum that you can contribute to your HSA. For 2020, you are able to contribute up to $3,550 to your HSA. Do note, sometimes employers might contribute to your HSA if you are signed up for a HDHP. If that is the case, the employer contributed amount will also count towards your annual limit (i.e. - if employer contributes $500 to your HSA, you are only able to contribute up to $3,000 to your HSA for that year).

2. Your HSA balance might be go down. Since you are investing your HSA similar to other investment/retirement accounts there is always risk that when you need to withdraw money you are in a market downturn. If you need the money immediately, you might be forced to sell your stocks at a loss which means you would end up losing money. I recommend having an emergency fund saved up to use for that kind of situation. That way you can save the medical expense receipt and withdraw from your HSA when market/your balance is better.

How do I start a HSA?

Your employer should provide information on how to open your HSA. Usually it is administered by the same company as your retirement accounts (401K, 403B, etc.).

For example, Fidelity (https://www.fidelity.com/go/hsa/why-hsa) supports HSA and other investment accounts.

Bank of America (https://healthaccounts.bankofamerica.com/individuals-families.shtml) also offers it too. You can check with the banks you are familiar with.

How do I plan to use the HSA?

I see the HSA as another way to invest for retirement so that is my main reason for contributing to my HSA. I plan on maxing out my HSA every year as long as I am able to. Any medical expenses that I incur, I will save the receipts so that I can withdraw later. The reason is because I want to let me HSA grow.

A tip I want to share with everyone is to make sure that your HSA is invested! I made the mistake of contributing to my HSA every month and not realizing that the amount in my HSA wasn't being invested. i didn't find out until almost a year into contributing! (I was wondering why my HSA investment wasn't growing as my other retirement accounts...)

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