Why I’m switching to an HSA account

Insurance
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Do you know what’s the biggest expense that you will incur in your lifetime?

Nope. It’s not your home.

I remember my hands were shaking when I handed my agent a $43,000 cashier’s check as down payment for our house, 13 years ago. But like I said, it’s not the house. Not even close.

Our modest house being built in 2004, isn’t she pretty?

Your house may very well be your single biggest purchase, but it’s not the biggest expense that you will INCUR IN YOUR LIFETIME.

Guess again…

Nope. It’s not cable (geez.. Are you really spending that much on entertainment?).

Here’s a clue:

You guessed it right this time. It’s TAXES!

Of course, this largely depends upon your tax rate. With a progressive tax system, the higher your income, the higher taxes are imposed. Here’s a link to 2017 tax brackets courtesy of Bankrate.

Assuming you’re in the 25% tax bracket, like my wife and I filing jointly do, you might be looking at paying a million-dollar tax bill over the course of your lifetime. And this doesn’t include sales and property taxes.

Now, how about the second biggest expense ???

Stop bringing up the house again.</p?

Try again…

Nope. It’s not your car, unless you’re driving a really fancy one like this Lamborghini.

Student loans? Nope, unless you’re a broke doctor or a lawyer.

Here’s another clue:

You are absolutely correct. It’s HEALTHCARE!

According to a 2010 Prudential study, a typical 65yo married couple free of chronic disease, can expect to spend $197,000 on remaining lifetime health care costs– excluding nursing home care and there is 5% probability that these costs will exceed $311,000.

Note that these numbers don’t include expenses that you have already incurred on healthcare before age 65!

So it’s TAXES and HEALTHCARE– two of the biggest expenditures that we will incur in our lifetime.

Wouldn’t it be great to be able to save money on both?

Health Savings Account (HSA) to the rescue

A health savings account is a tax-advantaged plan that is available to people with a high-deductible health insurance. The idea is that when people use their own savings for healthcare, they are likely to shop around for the best deal, which helps control health care costs.

Although HSAs have been around for more than 13 years, it was only a couple of years ago when it was actually offered by my company’s healthcare plan. Even then, I didn’t pay much attention to it because I’m already maxing out my ROTH IRA in addition to my company-sponsored retirement plan.

This year, I decided to switch. This is because my employer appears to be in the process of getting-rid of the 401(K) company match. I figured that since I am likely to spend a ton of money on healthcare when I get old anyway, why not max-out my HSA contributions first?

By maximizing the tax savings, I will, in effect, free up more resources for other expenditures like home renovations, vacations, and other fun stuff in retirement.

Note that this plan is not for everyone. It is particularly beneficial for people who are savers and are in excellent health condition like me.

Awesome Tax Advantages

With an HSA, you can contribute pre-tax money, just like a 401(K) or Canadian RRSP up to a pre-defined contribution limit. In 2017, the annual HSA contribution limit for individuals is $3,400 and $6,750 for families.

You can then use the money saved in your HSA self-directed investment account to buy individual stocks, mutual funds or ETFs (much to your heart’s content) and your earnings will be TAX-FREE as long as you use them for qualified expenses.

There is also no Required Minimum Distribution– You are not forced to take money out of them, which can potentially bump you up to a higher tax bracket.

In other words, an HSA account combines the TAX-DEFERRED feature of a 401(K) or RRSP, and the TAX-FREE and No RMD aspects of a ROTH-IRA, provided that you use them for qualified medical expenses, which you will surely incur anyway!

Eligible medical expenses may include things like contact lenses, dental treatments, insurance premiums, long-term care, and laboratory fees.

I don’t believe that Obamacare is that broken to be repealed. But it’s a shame that President Trump wasn’t able to negotiate a deal with democrats last week to pass the American Health Care Act into fruition. The proposed bill would have expanded the HSA by increasing the contribution limits and lowering the percentage of the tax on distributions that are not used for qualified expenses.

Here’s how I plan to use it

A little known feature is that you’re allowed to pull out and reimburse yourself for past eligible expenses AT ANY TIME— as long as you keep the receipts.

For example, instead of withdrawing money from the HSA account to cover things like routine dental treatments or medical check-ups, I can pay for these out-of-pocket. In this way, the money invested in the account can continue to grow and compound– tax-free.

Later down the road, say in 20 years, I can reimburse myself for these expenses and use the money for paying non-eligible expenses that would have been taxable otherwise. That $1,000 that you didn’t take out, 20 years ago, would have grown to maybe $10,000, depending on how it is invested.

By doing this, you’ll have more money to spend for major expenses such as long-term care or heaven forbid, open-heart surgery.

May you stay healthy.

Where can I set up a HSA account? Can I use it for a stress test that was done in Jan, that we still owe a $1,000 on?

Our HSA is set up through our employer. When we signed up for a high deductible health plan (HDHP) during open enrollment we were required to have an HSA because our employer makes a small contribution to our HSA. We can now go into our HSA and change contribution amounts in a similar way one changes contributions to a 401k.

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