Do You Have a Triple-Tax-Free Investment Account?
In a recent article from Financial Advisor Magazine, Steve Garmhausen highlights a powerful but underutilized strategy: using Health Savings Accounts (HSAs) as “medical IRAs.” While many are familiar with Roth IRAs and their tax advantages, HSAs offer an even more compelling triple-tax-free benefit. Yet, despite these benefits, the strategy hasn’t gained widespread traction.
Roth IRAs have become a staple in many Americans’ retirement plans, attracting over $1 trillion due to their “double-tax-free treatment—after-tax contributions grow and are withdrawn tax-free.”
The triple-tax-free nature of HSAs makes them an incredibly potent tool for funding medical expenses in retirement.
What are the Three Tax Benefits of HSAs?
- Contributions to HSAs are tax-deductible, giving them special appeal to high-income investors.
- Dividends, interest, and capital gains earned on investing in an HSA are free of tax just like they are in traditional IRAs and Roth IRAs.
- And if you use the money for medical expenses, HSA withdrawals are tax-free. That’s true whether you are 40 years old or 65 years old.
In order to fund an HSA, you must have a high-deductible health insurance plan. The minimum deductible for a health plan to qualify as a high-deductible plan in 2024 is $1,600 for an individual and $3,200 for family coverage.
The Most Powerful Vehicle in the Entire Tax Code
Michael Henley, CEO of Brandywine Oak Private Wealth, who is quoted in the piece says, “We’d argue that HSAs are probably the most powerful vehicle in the entire tax code, even probably more than the Roth IRA.”
To take advantage of the Triple-Tax-free HSA you will ideally want to contribute up to the annual limit of $4,150 for individuals or $8,300 for family coverage and invest that money for the long-term.
To make this work you must be able to fund medical expenses out-of-pocket.
Compounding Growth and Your HSA
If you invest $8,300 annually from age 35 to 65 with an 8% annual return, you could accumulate over $900,000 to fund medical expenses in retirement.
$900,000 may sound like far too much to spend on healthcare, but don’t forget about inflation. Assuming a 3% inflation rate, that $900,000 is the equivalent of about $372,000 today. Fidelity estimates a couple retiring today could spend $315,000 on medical expenses so $372K is right in the ballpark.
By leveraging the triple-tax-free benefits of HSAs, investors can build a substantial tax-free fund to cover future medical expenses.