A Few Simple Tricks Turn Humble HSAs Into Wealth Builders, Ep # 287

Do you have an HSA? If so, do you simply use it to pay for your medical expenses? Or do you use it as a way to build your wealth? Today we’ll look at an article from Financial Advisor Magazine that will help us identify opportunities for wealth creation.

Listen in to learn how to maximize the triple benefit of the humble HSA.

Outline of This Episode

[1:22] A few tricks to turn the humble HSA into a wealth builder
[12:30] What is the Pension Benefit Guarantee Corporation?

HSAs are underutilized savings tools

This week’s retirement headline is called A Few Simple Tricks Turn Humble HSAs into Wealth Builders. Since it comes from Financial Advisor Magazine it is written more toward financial advisors than the general public, but if you’re listening to this show, chances are you are deeply interested in maximizing your savings as you prepare for retirement.

HSAs are one of the most underutilized financial planning opportunities. While there are 32 million HSA accounts in the United States, only about a third of those assets are invested. This is due to the fact that many don’t recognize how their HSA accounts can be used as wealth accumulation tools.

Many people don’t recognize how their HSA accounts can be used as wealth accumulation tools. Click To Tweet

The HSA is one of the few accounts that receives a triple tax advantage

Average annual healthcare premiums have risen 47% in the past ten years which means that high deductible plans can be a helpful solution to rising healthcare costs. However, not all insurance policies qualify for these plans. HSAs require at least a $1,400 deductible and contributions are limited to $3,850 for individuals and $7,750 for families.

The real beauty of the HSA is that they have a triple tax benefit. This means that payroll earnings are free of taxes, investments grow tax-free, and money taken from the account is also tax-free. There is never a taxable distribution from an HSA.

The real beauty of the HSA is that they have a triple tax benefit. Click To Tweet

The lookback allowance is key to generating wealth with the HSA

HSAs can be passed on to a spouse who can continue to use it. Non-spouse beneficiaries have 12 months to make any overlooked tax-free withdrawals.

It is important to note that withdrawals can only be made to cover medical expenses. Medical expenses can include, dental, vision, hearing aids, Medicare premiums, medically necessary home modifications, and even long-term care insurance premiums. However, you can use the look-back allowance to spend down the HSA dollars at a later date. Listen in to hear how this can be used in real-life situations.

Listen in to learn how to use the look-back allowance. Click To Tweet

My thoughts on the HSA

I love the HSA for super savers. It works best if you can fund it and don’t need access to the funds. The true magic is in the long-term investment capability.

If you don’t have many medical expenses or excess cash flow, I recommend first funding your 401K up to the employer-sponsored match, then taking advantage of any Roth contributions you are eligible for, and then funding the HSA if you have that opportunity. Use the balance of your HSA for growth and treat it the way you would a Roth. That is where the beauty of this underappreciated account comes in.