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The Ultimate Savings Account You Already Have

Disasters happen! Your roof leaks, a tree falls on your house, your car falls into the ocean (this really happened in Wellfleet, MA…look it up). Everyday life events can have a devastating impact on your financial wellbeing if you don’t have an emergency fund built up. Financial experts recommend an emergency fund of roughly 3-6 months of expenses saved up for life’s unexpected events. These savings within the emergency fund should be reserved for an EMERGENCY ONLY. I like to define an emergency as anything that can disrupt your ability to live a healthy life or disrupt your ability to make money.  

So no…you shouldn’t tap into the emergency fund for a down payment on a Tesla, or a trip to Aruba, or the latest Apple product. The funds should remain in a separate account that is far from your checking or personal savings account. 

But what if I told you that you might already have an emergency fund and didn’t know it? A growing number of savvy investors have figured out a way to supplement traditional emergency funds using a little known investment account that most Americans already have access to.   

Health Savings Account (HSA)

The Health Savings Account (HSA) is the golden goose of investment accounts!  As mentioned in another blog post, the Medicare Modernization Act (MMA) established the ability for Americans to take advantage of an HSA to save money for health expenditures. The account is available to anyone enrolled in a high-deductible health plan (HDHP). The beauty of the HSA is the money goes into the account tax free, grows tax free, and can be distributed tax free for qualified medical expenses. You can read more about the basics of an HSA, how they work, qualifications, and investment strategies HERE.   

The HSA is an investment account and should be invested in the stock market to pay for FUTURE medical expenses.  Future is the key word here! If you have current medical expenses then a Flexible Spending Account (FSA) may be available through your workplace benefits or you could simply use cash on-hand if your health expenses are low. Using the HSA as an investment account has the ability to yield a very large retirement fund…in some cases greater than $1 Million.

 

 

How Do Distributions Work?

A distribution from an HSA is any withdrawal of money from the account for qualified or non-qualified purposes. Distributions are typically accomplished using a debit card, reimbursement check, or electronic transfer to a financial institution. 

  1. Qualified HSA Distribution – For qualified medical expenses, you typically pay the healthcare provider with a debit card at the time of service OR you pay out of pocket and submit the expense to your HSA provider for reimbursement.  The distribution is tax free!   
  2. Non Qualified HSA Distribution – Any distribution from the HSA that is used for non-medical purposes will be taxed as ordinary income and a 20% penalty will be applied. 
 

Most commonly, individuals use the HSA as a means to save for future health costs and pay for ongoing medical expenses throughout the year. If you read my other blog post (HERE) you would already know that the HSA should be used as an investment vehicle because it is the only investment account that has triple tax benefit. Tax free contributions, tax free growth, and tax free distribution. The HSA should serve as a cornerstone to any investment portfolio!  Paying for medical expenses with cash (not the HSA) will give the account time to grow and benefit from the magic of compounding. 

The Secret

The Medicare Moderation Act does not stipulate a specific timeframe that the HSA reimbursements must be used. Put another way – you could literally pay for your health expenses with cash on-hand (not HSA money) and save all your receipts over a lifetime to cash them in at a later date for money. Medical receipts are basically “HSA Coupons” that can be used to remove money from your HSA when you need it. And since the receipts serve as proof of medical expenditure, the money can be removed for any purpose. So the HSA could serve as an emergency account if you don’t already have one built up or the HSA could be used to supplement income in your later years. The key is you must pay for current medial expenses with cash on hand and not use the HSA money until you really need it. The qualified medical expense receipts must be saved in a safe place since they hold value equivalent to cash. 

Steps Involved

  1. Enroll in a High-Deductible Health Plan (HDHP) and contribute to an HSA.  
  2. Invest the annual HSA contributions in the stock market.  Don’t have an HSA account?  You can sign up for one HERE.
  3. Use cash on hand (or a credit card to collect reward points) to pay for medical expenses. Do NOT use the HSA for health expenses if you don’t need the money.
  4. Save a copy of all receipts in a safe place. Evernote is a great option for tracking! 
  5. In the event of an emergency, you can “cash in” the saved medical receipts to remove money from the HSA. This money can be used for ANYTHING if you have the medical receipts. These distributions will be tax free! All you need to do is accumulate qualified medical expense receipts over your lifetime. 

Example

A 25-year old Pharmacist contributes the maximum IRS family limit ($7,200 in 2021) to her HSA annually. She invests the HSA in the stock market and does not use it for health expenses. She pays out of pocket for health expenses and documents all of her spending by taking pictures of all receipts and maintaining a spreadsheet of health expenses over the next 20 years.  Let’s assume the historical stock market gains of 10%.

At 45, she decides that she would like to take a sabbatical from her job as a retail Pharmacist to spend more time with her kids. Her HSA account now has $460,818 after 20 years of contributions and 20 years of growth in the stock market. She has documented over $60,000 in health expenses over the timeframe. She can submit the accumulated receipts to her HSA bank and withdraw all $60k all at one time.  And this distribution is tax free!

Helpful Resources

How Do I Personally Use an HSA?

  • I maximize the HSA contribution limits on an annual basis (contact your HR Benefits office to set this up during open enrollment).  In 2021 this is $3,600 for an individual and $7,200 for a family.  

  • I immediately invest the payroll deduction every two weeks in an S&P 500 Index fund.

  • I pay for my current medical expenses out of pocket and document all of my medical expenses in Evernote and on a Google Spreadsheet.

  • I let the HSA grow in the stock market. I plan to sell the investments in retirement or in the event that I am struck with an emergency that my cash on-hand can not cover.

 
Over time you could have a substantial amount of money sitting in an HSA that can not only serve as an emergency fund but also supplement future retirement and health spending needs.  Or you could just use the money to buy a Tesla! (But make sure you have qualified medical receipts)