Do you hate paying taxes? Me too. That’s why I use a Health Savings Account – the only (legal) way to avoid taxes. So how does a Health Savings Account (or HSA) work?
Boom, boom and boom.
Just like your 401k contributions, money you put in an HSA is tax-deductible. That means you don’t pay income taxes on that money – the more you put in, the lower your tax bill that year.
The caveat is you can only put money in an HSA if you are enrolled in a high-deductible health plan (HDHP).
A high-deductible health plan is just like a regular plan except the deductibles are bigger (it’s all in the name, innit?). The minimum annual deductible (for 2020) is $1,400 if it’s just you, and $2,800 for a family.
That means you’ll pay $2,800 before your insurance kicks in, but it’s worth it because…
….you can invest your HSA in a properly diversified, low-cost ETF portfolio and it’s NOT use-it-or-lose-it, so you can let your HSA savings accumulate over the years.
And just like your 401k, the money in your HSA grows tax-free.
But the best part is…
If you use your HSA money for qualified medical expenses, you won’t pay any taxes when you take the money out.
It’s the best of both worlds. The money goes pre-tax like a Traditional 401k, grows tax-free while it’s in there and then comes out tax-free like a Roth IRA.
The caveat is you have to use your HSA money for qualified medical expenses. If you use it to buy groceries instead, then Uncle Sam will come collecting.
Most people use the money they put into their HSA to pay for medical bills throughout the year.
And admittedly, this is how it was intended to be used when George W. Bush wrote it into law nearly 20 years ago.
But it’s also absolutely wrong.
Because you can invest your HSA and the money never expires, it’s the best retirement account you’ll ever have.
So instead of using the money for qualified medical expenses NOW, you wait to use it on qualified medical expenses when you retire.
That will give your money 30+ years to grow tax-free. And the more your HSA grows, the more you save on taxes.
(And don’t worry about having enough medical bills in retirement. One qualified medical expense is using it to pay your Medicare premiums which all retirees pay.)
In order for this to work, you have to pay your medical bills out-of-pocket today until your insurance kicks in.
That means you can expect to pay the family deductible of $2800. But you can save up to $7100 in your HSA which still makes the math come out massively in your favor.
This financial planning strategy is relatively new since HSA’s were “invented” only back in 2003.
So it’s up to people who know to spread the word.
That now includes you, so share this with every parent you know. The next time someone complains about paying taxes, say “Have ya heard about health savings accounts?”
All of this being said, whether an HSA is right for you depends on your financial situation. This is NOT A RECOMMENDATION because I know nothing about your situation and therefore can’t possibly know if it makes sense for you and your family.
But I DO recommend you look into it. Talk to your financial planner to determine if it’s right for you.
And if you don’t have someone to talk to, then talk to us. Schedule your Discovery Call and we’ll help you figure out if it’s right for your family.