You are (probably) leaving money on Uncle Sam’s Table.

It’s that time of year right after annual reviews, when many people sit down and think about taxes, retirement, and benefits for this year and next. As someone who administers our benefits, I am sure my co-workers are tired of hearing me discuss the amazing benefits of their 401k plan and their Health Savings Accounts. But, I cannot proselytize enough about the benefits of HSAs, an often under-utilized, misunderstood and thusly under-valued benefit. There are very few things in life that are quadruple tax deferred, and an HSA is one of them.

When you defer money into a HSA:

  • Funds are pre-tax (e.g. pre-federal and state income taxes)
  • Again, they are really pre-tax, including FICA taxes (your 401k *doesn’t* have this benefit.)
  • If you use the funds from your HSA for an eligible expense, it is not taxed went spent, (therefore funds remained completely untaxed from your payroll deferral to it’s expenditure)
  • Further, if you invest funds within your HSA any interest, dividends, capitals gains, etc., you make on those funds remain tax deferred, and if spent on qualified expenses, keeps that status.

That is four ways you’re not paying taxes on deferred funds. Your 401k cannot compete. It’s tax deferred on the way in. But you still pay Medicare and SS on those funds. It’s taxed on the way out, and worse still penalized if you do so before retirement. Almost always, in every situation you should be maximizing your HSA contributions before your 401k (unless there is an employer match.)

Next, there is presently no time period when you are required to reimburse yourself from your HSA per IRS rules. And a common tactic is to incur the cost directly out of pocket, record the expense in your HSA account as an unreimbursed expense, upload and save that receipt while leaving the funds in you HSA to grow waiting until later to reimburse yourself. Typically invested in an index fund, so it outpaces inflation (and to steal a quote often attributed to Einstein, “Compound interest is the most powerful force in the universe.“) This can further be sweetened by using a rewards style credit card so you get the (non-taxable) perks of cash back, frequent flier miles, there are even Bitcoin rewards credit cards (affiliate link) now! – whatever it is, you can get that perk from your health spending too, *now*. This goes with a huge caveat that you must be disciplined in paying your credit card off in full each month, or this benefit is completely lost and forfeited even with one month’s worth of interest accrued.

Next, HSA funds never expire. This isn’t a flexible *spending* account. It’s a savings account for a reason. And the HSA / FSA acronyms obfuscate that difference. HSA’s are for saving. Again, funds you defer into your HSA never expire. Those funds are always yours until you spend them, and beyond some mostly minor fees (determined on your plan’s setup) that typically cost nothing to keep open, and often disappear once you hit threshold account balances. Funds will sit there, and if managed properly will compound and grow over time. Even if you switch to a non-HSA health plan in the future, you can use previously deferred amounts for your co-pays, etc.

When you retire, you can use HSA funds to cover healthcare premiums related to tack on Medicare part B, part D, part whatever they come up with next plans. Further, if you did stack receipts as noted above, you can draw those funds back in lump sum tax free – without affecting other taxable incomes that your IRA or 401k will affect (and sometimes depending on your age also affect other pensions or SS benefits.)

But even if you do none of this and your federal tax rate is 0%, and contribute and spend that money right away. Why wouldn’t you save the 6.8% on FICA taxes, and keep the 3% cash bank from your rewards card for the doctor’s appointment you were going to pay for anyways? Further, who wouldn’t take the 9.8% discount on their ibuprofen, tampons, at-home Covid tests, or even sunscreen!? There is an Amazon HSA store (affiliate link) , with all sorts of qualified items you can use your HSA for. You’re paying taxes on every day things, when you shouldn’t be.

All of which ignores the usual argument of “I am young and healthy”. Yes, you may be that to today, but that will change. You may even remain healthy your whole life, but keeping that way will require future health spending. Plan for that now. And if it all goes perfectly, you can cash out your appreciated HSA funds at retirement and pay your then marginal tax rate on those distributions. You’ll thank yourself later. I promise.

If you have an HSA available to you, and you’re not doing your best to try to maximize contributions, you are probably leaving money on Uncle Sam’s table. Which I ask you – why?

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