The Secret Early Retirement Account: How HSAs Can Help You Achieve Financial Independence
Most people don’t know it, but Health Savings Accounts (HSAs) can play a big part in helping people achieve F.I.R.E if used wisely. Our HSA has been massively helpful for Amon and me and definitely contributed to our ability to retire early.
That’s why I’m going to discuss our account with you, so you can see how we chose to invest in our HSA and how you might be able to also invest in an HSA on your journey to financial independence.
What is an HSA?
The truth is that the majority of people only see the HSA as exactly what it’s called - a Health Savings Account. But in the F.I.R.E community, an HSA is almost always seen as an alternative retirement account. It might sound confusing at first, but just wait. Toward the end of this article, I’m going to share the retirement hack that many people have started using on their F.I.R.E journey.
But first, what is an HSA exactly? An HSA is a personal savings account that can be used for qualified health expenses. And unlike other accounts, HSAs offer a triple tax benefit!
First, HSA contributions are pre-taxed, so all of the money you deposit into it grows tax-free. Second, all withdrawals are tax-free for qualified medical expenses. Third (and best of all), at age 65 and older, your HSA can be used as a traditional IRA, meaning all of the money in your HSA can be used towards any of your other expenses - even if they aren’t for medical expenses.
Who Is Eligible For an HSA?
You need to be enrolled in a high-deductible health plan to be eligible for an HSA. These plans have a higher deductible than traditional insurance plans. They typically have lower monthly premiums, but more of a deductible before your insurance company begins to pay.
Our family of four was enrolled in a high-deductible health plan which is how we were eligible to contribute to our HSA. Our monthly premiums were $300, and we paid a $3,000 annual deductible. Our insurance company also contributed $1,800 per year to our HSA account which was essentially free money!
This is called a premium pass-through contribution, and it varies greatly depending on your insurance company, so you want to check with your individual insurance company regarding their premium pass-throughs. One thing to remember is that these premium pass-through contributions are still considered your money, and if you don’t spend it by the end of the calendar year, the money simply rolls over into the next one, and on and on. There is no time limit for using the money in your HSA.
How We Used an HSA On Our F.I.R.E Journey
Now on to the juicy details. Most people put their HSA savings aside until they need them for medical expenses. But we didn’t do that. Instead, we connected our HSA to a brokerage account so that we could invest our HSA money in the stock market.
The majority of people don’t even know that this is possible. In fact, studies have shown that only 25% of eligible people use HSAs. Of that group, only 15% use HSAs for investing. This is a colossal missed opportunity for many people. And it’s partially because your typical financial advisor isn’t talking about HSAs - they’re throwing out 401ks, or maybe Roth IRAs and Traditional IRAs. Not much is discussed about the HSA.
But, when Amon and I discovered the triple tax benefits of the HSA, we started taking full advantage of it. We made sure to max out our contributions every year . . . and not just put those contributions into our savings, but to invest them also.
When it came to our HSA account, we were making contributions every month alongside the additional contributions from our insurance company. This helped to reduce our taxable income, which is another benefit of the HSA..
How To Invest With an HSA
Now remember - the key to optimizing our HSA was to not only save money in it, but to also invest that money. With an HSA, it isn’t enough to just let your money sit in the account as savings. You need to invest it! A lot of people don’t realize this, but by letting your HSA sit simply as a savings account, you are losing money in the long run. And you lose money twice: First, you lose money simply because of the overall impacts of inflation; second, you’re losing money specifically due to the rising costs of healthcare. By investing the money in our HSA, we were not only keeping up with the costs of inflation and healthcare, but the returns on our investments were greatly exceeding those costs.
Our HSA was with HSA Bank, which is also connected to TD Ameritrade. With our TD Ameritrade account, we invested in the iShares Core U.S REIT ETF, which has a 0.08 expense ratio. And our reasoning for investing in the REIT: Well, most of our accounts are very diversified and invested in index funds and sector ETFs. But with this account, we wanted to specifically invest in a REIT for two reasons: First, REIT ETFs give incredible dividends. We collect almost 5% in dividends from iShares as well as its appreciation; second, we wanted to hold a high-dividend ETF in a tax-deferred account, because it’s more tax-efficient. Not to mention, this REIT has returned over 20% over the years we’ve held it - it’s been an incredible investment for us.
How Do You Deal With Actual Medical Expenses?
So, since weren’t using our HSA to pay for actual medical expenses, what did we do about those actual medical expenses? We get this question a lot! And that’s actually where the hack comes in.
Remember that, over the years, the money in our HSA has been compounding. If we would have started to take that money out of our HSA to pay for medical expenses, we would have essentially stopped that money from compounding and growing.
We didn’t want to do that, so we simply paid for our medical expenses with our normal savings account. And the whole time, we kept our medical receipts. And that’s because you can be reimbursed for those expenses through your HSA at any point. Meaning that if we wanted to be reimbursed for medical expenses fifteen years after we incurred them, we could get that reimbursement . . . as long as we saved our receipts (which we have)! In other words, if we wait (for example) fifteen years to take money out of our HSA to reimburse ourselves for medical expenses, that would mean we would have fifteen years to allow our money to grow in our HSA. That’s fifteen years of compound interest and capital gains! But, imagine instead, if we pulled that money out immediately after every medical expense - we would miss out on all the capital gains and compound interest accruing over time.
The key to holding an HSA is treating it like any other investing account, You put money in and let it grow! Then, you pay off your medical expenses with a normal savings account. What we chose to do was to upload our receipts to the cloud, so that if we do need to withdraw from our HSA sometime in the distant future, we have the medical receipts to claim a tax-free distribution from our HSA.
We don’t plan to do that, but it’s good to have the option. Instead, we plan to let our HSA compound over the next 20 years and cash it out when we’re 65. By then, our account balances will be astronomical and, more importantly, at 65 we’ll be able to withdraw money from our HSA for any purpose (penalty-free) - including non-medical related expenses!
And this is why the HSA is so important if you’re planning for financial independence. F.I.R.E is all about having these different investments and income sources working in the background. And an HSA is a powerful account to maintain in your arsenal. Achieving F.I.R.E is all about thinking creatively and being strategic with your money, and this HSA hack is a perfect example of that.
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