How The Best-Kept Secret Of The US Tax Code Can Help You Save For Retirement
From: www.forbes.com
This month I was lucky enough to sit down with Jean Chatzky, CEO of
Why is it a secret? Well, it’s technically not. But, the benefits of this account are so great that it almost feels like the IRS made a mistake and wouldn’t want us to know about it.
What is an HSA?
Let’s start at the top. A Health Savings Account is a benefit offered to those with high-deductible health plans. The way it works is simple: make contributions from your paycheck prior to paying taxes, and then withdraw the non-taxed money to cover health care-related costs.
How do I use it?
There are two basic ways to use an HSA: spend it or save it.
For the spenders, the benefits are immediate. Just by filtering money through this account to cover expenses such as co-pays, prescriptions and other eligible expenses, you’re potentially saving up to 40% by bypassing both state and federal income taxes. Plus, the list of eligible items has expanded to include not just the obvious medical costs, but also basic over-the-counter items like contact lens solution, tampons, pregnancy tests, sunscreen and lip balm.
For those who can afford to cover their out-of-pocket health care costs without using the money in their HSA, the account becomes an even more powerful tool.
Saving (and investing) your HSA
Just like an IRA or 401(k), a Health Savings Account is investible. Meaning you can put money into this account BEFORE paying taxes, invest it so that it grows throughout your career, and then withdraw money after you retire to cover eligible expenses all WITHOUT PAYING TAXES.
I apologize for yelling. This is all very exciting. And only 6% of people actually use the investing feature of the HSA, which means the fact that this is arguably the greatest retirement savings vehicle of all time is basically a secret.
How to hack it
Life hacks are still all the rage, right? Well here is one way to hack your HSA: keep your receipts.
What a lot of people don’t know is that there is no time limit for receiving reimbursements from your HSA as long as you have the receipt. So, let’s look at this way:
It’s 2020. You have $10,000 in your HSA. You don’t touch the funds, but you keep a neat collection of receipts from every eligible expense you make. You continue to contribute to the account.
Fast forward to 2050. You’re reaching retirement age. Thanks to your regular contributions and the power of dividends and compound interest, your account now has $100,000 (this is a made-up number and not at all guaranteed, of course). You can take your giant stack of receipts from the past 30 years and cash them out at once, pay zero dollars in taxes or fees on the money, and use that money as retirement income or to even fund your next vacation.
What should I do right now?
Go to your health plan provider and find out if you’re eligible for an HSA. If you are, open an account and turn on automatic contributions so that every month a portion of your paycheck is automatically added to the account. Now you don’t have to remember to contribute or think about it ever again.
Then use the account in the way that works for you. Whether you spend it, save it or a combination of the two, you’re saving money.
The lesson:
Many people know of and may even have an HSA, but that doesn’t mean they truly understand it. Learning how to use this type of account to its full advantage can be a game changer in your financial life—both now and in the future.
To learn more about Health Savings Accounts and how to use them, attend HSA Day on October 15, 2020 at lovemyhsa.com.
