I’ve never had an employer that offered health insurance. As such, I’ve always purchased private insurance. Over the years I’ve carried both low deductible and high deductible health plans (HDHP). To qualify as a HDHP in 2021, the plan must have a deductible of at least $1,400 for an individual or $2,800 for a family.
When you have a HDHP, you are eligible to open up a Health Savings Account, or HSA. Here’s a little background on the HSA from Wikipedia:
“A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), HSA funds roll over and accumulate year to year if they are not spent. HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either high-deductible health plans or standard health plans.”
The money in your HSA can be used to either pay for or reimburse yourself for qualified medical expenses that were incurred after the HSA was established. If you have the means for paying your medical expenses using out of pocket money, then you can invest the capital in the HSA and allow it to grow with a whole host of tax benefits.
Twin Tax Benefits
Money deposited into your HSA reduces your taxable income today. In that sense, it like contributing to a 401k or traditional IRA. If your income is $80,000 but you contribute $7,200 to your HSA, then your taxable income falls to $72,800.
But that’s not all!
The money is can also be invested and grows TAX FREE. In that sense, it performs like a ROTH IRA.
I’ve used a variety of HSA providers over the years. Some charge monthly fees, others don’t. I currently use Fidelity who doesn’t have a fee. The investments you can do in an HSA are similar to those allowed in an IRA. Because I don’t want to micromanage mine, I built a diversified stock portfolio using low-cost stock ETFs.
If I could go back and start over, I wouldn’t have tapped into my HSA as much as I did. I have four kids and child birth with a high deductible health plan isn’t cheap. We used the HSA funds to pay for many of our medical expenses – even though I had the means to pay out of pocket. If I had better foresight, my HSA account would be quite a bit larger and all the gains from investments would be tax free.
If you buy private insurance and haven’t looked into an HSA, consider this your nudge to do so. It can be a fantastic tool to add to your wealth building arsenal.
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