Harness the Power of a Health Savings Account (HSA)

Newton’s First Law of Motion, that a moving object will persist in both speed and direction unless interrupted by an external force, has significant financial implications. The ethic to habitually save and invest a portion of one’s monthly excess minimizes external forces of derailment with the wealth it creates. Dollar-cost averaging, matched and/or deductible contributions, tax deferred growth, low expense index funds, and penalized early withdrawals are contributing factors to continuous wealth production. The portion of your retirement expenses attributable to future healthcare costs, which the Bureau of Labor Statistics suggests for Americans is presently 8.1%, or $13,000 annually,1 is treated preferentially to your other investments in a Health Savings Account (HSA), and can, therefore, compound that portion of your retirement wealth more efficiently.

HSA’s offer for qualified expenses what Traditional and Roth IRA’s don’t: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals, whoa! Since future qualified healthcare costs will likely exceed what is accumulated in a HSA, most Americans should be utilizing this super tax-efficient means of wealth production. Consider the rules, dynamics, and primary benefit of a HSA:

HSA RULES

• 2023 HSA contributions require enrollment in a health plan with a minimum individual deductible of $1,500 ($3,000 for a family), and an out of pocket maximum of $7,500 ($15,000 for family).
• Participants may not be enrolled in Medicare, and may not be claimed as a dependent on someone else’s tax return.
• The 2023 contribution limit is $3,850 ($7,750 for family), though participants over age 55 can invest an extra $1,000.
• Contributions must be made by the tax filing deadline, like IRA’s (April 18, 2023 for 2022 contributions).
• A 6% excise tax applies to overcontributions, and stiff taxes and penalties apply to distributions spent on nonqualified expenses,2 so know HSA rules .
• Qualified medical expenses include co-pays, dental treatments, medications, and many over-the-counter products, but do not include cosmetic services, gym memberships or supplements. IRS Publication 502 provides a more exhaustive list.3

HSA Dynamics

• Tax-deferred growth is a key benefit of the program, yet only 15% of current HSA’s are invested! Some custodians offer stocks, bonds, mutual funds and ETF’s. Consider your time horizon, risk tolerance and investment objective before investing HSA funds.
• Keep receipts and an expense log for HSA transactions.
• Name beneficiaries on a HSA account. Spouses inherit all tax benefits, but non-spouses lose the tax-free withdrawal benefit.?

HSA Primary Benefit?

Deducting an investment (into a great business at a fair price) from your taxable income, then compounding the dividends and growth of that investment on a tax-deferred basis for decades, then withdrawing the funds to pay for future health expenses tax free, are the unequalled tax and investment benefits of the HSA.

The HSA, now that is an object in motion!

Think about it, Shaun.

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"It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price."? ~Warren Buffet

“The prudent sees danger and hides himself, but the simple go on and suffer for it.” ~Proverbs 27:12

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1,3,4 Evergreen Gavekal, “Utilizing a Health Savings Account”, by Katie Vercio, June 22, 2023 https://evergreengavekal.com/utilizing-a-health-savings-account/

2 Fidelity, “HSA Contribution Limits and Eligibility Rules”, September, 2022. https://www.fidelity.com/learning-center/smart-money/hsa-contribution-limits

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The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

All investing involves risk including the possible loss of principle. No strategy ensures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company. Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. Investors should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not insure a profit and does not protect against loss in declining markets.?

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