In the span of 4 years my wife and I have had three boys. With a growing family, comes growing medical expenses.
A few years ago we started saving and investing in a Health Savings Account (HSA). Roth IRAs are often touted as the ultimate savings vehicle, but nothing beats the tax benefits of an HSA account. To be utilized, an HSA must be attached to a qualified high-deductible health plan (HDHP), but these are becoming increasingly more common with the rising costs of healthcare.
People often confuse an HSA with a Flexible Spending Account (FSA). However, unlike an FSA, which must be spent every year, the HSA can be rolled over year after year and invested for tax-free growth if utilized to pay for “qualified medical expenses”. The list of qualifying medical expenses can be found on the IRS website and is fairly extensive. The qualified medical expense does not have to occur in same year the HSA funds are disbursed to cover that expense. As long as the expense was incurred and documented, the HSA funds can be matched with that expense and withdrawn at any time tax-free, even if 30 years down the road.
Here is how we utilize the HSA. We contribute the maximum family amount pre-tax, which is $7,300 for 2022.. My wife and I have been fortunate to be able to accrue an emergency savings fund. We use this savings fund to pay for medical expenses out of pocket, and then we invest the dollars that we contribute to the HSA account for future growth and medical expenses.
Undoubtedly, over our lifetime we will accrue enough medical expenses to be able to withdraw a significant amount of money out of the HSA tax-free in the future. According to a recent Fidelity study, an average retired couple age 65 in 2021 may need approximately $300,000 saved to cover health care expenses in retirement. An HSA allows pre-tax contributions going into the account, tax-sheltered investing while in the account, and the potential of tax-free withdrawals coming out. This is the only type of tax-advantaged savings account that allows for this triple tax benefit.
Lastly, if you want to be able to tax-advantage of the tax-free withdrawals in later years, you must keep accurate records of your medical expenses. Once a quarter, I pull all of our healthcare transactions into Google docs spreadsheet to keep track of the expenses.
