I love the Karate Kid. So my wife and I sat down to share the original film with our teenage daughters a few years ago. It didn’t go well. I had forgotten that Daniel gets beaten up for most of the movie and that the scenes are much longer and slower than the younger generation is used to. But I still love the fight scene at the end with the song “You’re the Best Around” playing as Daniel takes out Cobra Kai at his first ever tournament. (And I know, that song is totally in your head right now. You’re welcome!)
And somehow this got me thinking about Health Savings Accounts (HSAs). Like Daniel, HSAs are underestimated and overlooked. And also like Daniel, they are, in my opinion, the best around, as far as tax-advantaged vehicles go. They are the only savings vehicle that I am aware of that will give you a tax deduction on your contribution PLUS tax-free growth on your balance PLUS tax-free withdrawals (assuming the money is used for qualified medical expenses). And there is no income limit so everyone can participate, regardless of income level!
Of course, there are some caveats. You can only contribute to an HSA if your healthplan is a high deductible plan that is HSA compatible. Most people don’t want high deductibles, but this tends to lower the monthly premium and it opens the door to the benefits of an HSA. There are also limits on how much you can contribute each year ($3,850 for individuals and $7,750 for family coverage in 2023). And of course, you are designating this money for medical expenses so it can’t be used for other purposes without giving up the benefits and/or getting hit with penalties. However, I have yet to meet anyone who over-saved for future medical expenses and ran out of claims to pay for!
In my opinion, HSAs are a great vehicle (I believe the best around!!) for those who want to save for future medical expenses, especially those who want to retire early before Medicare kicks in. In practice, the biggest problem is that so many people are not taking full advantage of their benefits! Most people that I talk to know that they get the tax deduction on the contributions. But so many people are leaving the balance of the account in a cash account earning close to 0%, rather than getting the balance invested, because they don’t even know that the investment option exists! Most accounts offer a menu of investment options similar to a typical 401k account, but this is often not advertised very well. This is especially important if you are able to leave the money in the account for the long-term rather than paying current claims. You can get that balance invested for long-term growth and potentially never pay any taxes on the gains, as long as you use the money for medical expenses in the end.
Find out if your employer offers any HSA-compatible plans, and then call me or your financial advisor to discuss whether they are a suitable option for you. Don’t miss out on the best around!
The information provided herein is general in nature. It is not intended, nor should it be construed, as legal or tax advice. Because the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult your tax advisor before opening an HSA.
High-deductible health plans (HDHPs), which are a requirement for HSAs, aren’t always the best option for consumers, especially for those who have significant healthcare expenses.
You’ll owe income taxes plus a 20% penalty if you withdraw funds from your HSA for non-qualified expenses before you turn age 65. Once you’re 65, you’ll owe taxes but not the penalty.
No strategy assures success or protects against loss. Past performance is no guarantee of future results.