HSA’s can be an amazing way to never pay taxes on your income, but the benefit depends on how high
your medical costs are annually.
There’s a tipping point where the HSA Strategy does not make sense.
And it’s roughly around $4,000 in medical expenses for a family earning $350,000 a year.
To review, the HSA Strategy is:
1. Enroll in a high deductible health plan (HDHP)2. Max out and invest HSA contributions3. Pay out-of
pocket for medical expenses4. Use HSA to cover Medicare costs in retirement
To make the comparison, we assume you have enough pre-tax money to cover the out-of-pocket medical
expenses and contribute to an HSA.
Pre-tax HSA is $7200 and to cover $4,000 in medical expense, you need $6400 pre-tax (assuming 30% fed
+ 7.65% payroll tax)
So you need $13,615 set aside.
$7200 of that goes into your HSA. And if invested in an S&P 500 Index fund earning 10% per year, it will
grow to ~$48k in 20 years.
The rest is used to cover medical expenses.
The alternative is to take that $13,615, pay all the taxes on it and then invest it, grow it, then pay capital
taxes on it in 20 years.
I’ll spare you the math, but it comes to $46,000 in 20 years.
Obviously, you’d rather have $48,000 than $46,000 so the HSA is the way to go.
If you’re expecting medical expenses to rise above $4,000 in any given year (childbirth, surgery, etc.) then
you probably don’t want to be enrolled in a HDHP for that year.
Otherwise, for a healthy family with no anticipated medical procedures, the HSA Strategy is probably the
way to go.
This is for education purposes only, so please make sure to consult a professional before you move
forward with this strategy.
