Triple tax advantaged Health Savings Accounts, or HSAs, can be one of your most powerful retirement savings vehicles, but not many Americans know how to fully utilize them. Only 4% of HSA owners hold invested assets; the other 96% use their account as a slush fund to pay for current medical expenses. To be clear, using your HSA as a slush fund is still much better than not using an HSA at all. Contributions to an HSA are tax-deductible, and come out tax-free when used for qualified medical expenses (contributions are always federal income tax-free, and state income tax free
As a financial mutant, I’ve wondered the best approach to funding an HSA. Is it better to dollar-cost average through the year (general best practices for investing), or fully-fund the HSA at the beginning of the year to maximize the amount of time that the new annual limit is being invested?
Another factor in this question is that I would probably be dollar-cost averaging through employer payroll vs funding with the full lump sum from cash on-hand (and taking the tax deduction when filing taxes). It sounds like from your article that the latter approach would incur FICA taxes, while dollar-cost averaging through my employer would bypass FICA taxes.
I’ve been saving/investing with an HSA for many years now. Switching to a HDHP meant more risk initially, so I increased my emergency cash. But, after 1-2 years of maxing it out, it the risk was essentially gone and while some years I have higher health expenses, over the longer term, in my situation, my costs are lower. My HDHP covers my son and I who are low-risk. My wife has her own non-HDHP plan. This mix works best for us. My employer matches my HSA contributions some, so that makes it even better.
I do keep some of my HSA in lower-risk target date funds to reduce the risk of a year where I reach my $14k health insurance out-of-pocket maximum.
I’ve not yet had to spend any HSA funds. As was mentioned in the article, I keep my health care receipts. The most practical method I’ve found is to keep only receipts above $100. It’s just too tedious to keep so many small expense receipts.
I am still looking for a really good electronic receipt system (in addition to the physical receipts). I have found that my physical receipts can fade over many years. An ideal electronic system would be a smartphone app with storage in an open & independent system of my choosing that I also backup. I have not found a good one. Spreadsheets and pictures are tedious. Anyone else have something good? My HSA is through Fidelity.
Good stuff Daniel!
As a financial mutant, I’ve wondered the best approach to funding an HSA. Is it better to dollar-cost average through the year (general best practices for investing), or fully-fund the HSA at the beginning of the year to maximize the amount of time that the new annual limit is being invested?
Another factor in this question is that I would probably be dollar-cost averaging through employer payroll vs funding with the full lump sum from cash on-hand (and taking the tax deduction when filing taxes). It sounds like from your article that the latter approach would incur FICA taxes, while dollar-cost averaging through my employer would bypass FICA taxes.
Nice!! Thank you!
Question, I have a HDHP but I dont have a HSA account open yet. can I
open an HSA account mid year?
I’ve been saving/investing with an HSA for many years now. Switching to a HDHP meant more risk initially, so I increased my emergency cash. But, after 1-2 years of maxing it out, it the risk was essentially gone and while some years I have higher health expenses, over the longer term, in my situation, my costs are lower. My HDHP covers my son and I who are low-risk. My wife has her own non-HDHP plan. This mix works best for us. My employer matches my HSA contributions some, so that makes it even better.
I do keep some of my HSA in lower-risk target date funds to reduce the risk of a year where I reach my $14k health insurance out-of-pocket maximum.
I’ve not yet had to spend any HSA funds. As was mentioned in the article, I keep my health care receipts. The most practical method I’ve found is to keep only receipts above $100. It’s just too tedious to keep so many small expense receipts.
I am still looking for a really good electronic receipt system (in addition to the physical receipts). I have found that my physical receipts can fade over many years. An ideal electronic system would be a smartphone app with storage in an open & independent system of my choosing that I also backup. I have not found a good one. Spreadsheets and pictures are tedious. Anyone else have something good? My HSA is through Fidelity.