[ad_1] A core part of my job is talking to successful individuals about how they invest their money. Lately, I’ve interviewed a handful of wealthy people who can’t stop talking about health savings accounts (HSAs), which are meant for health costs but can also be used as an investment tool with significant tax perks. One millennial millionaire told me that, of the seven different investment accounts he uses, the HSA is “my favorite by far.” The conversations prompted me to make some changes to my finances. I happen to have an HSA, but I wasn’t using it in the same way these millionaires were. I was saving in the account, but not investing that money. Part of what was holding me back from investing the funds was a lack of awareness. “A lot of these tools we have available to us haven’t even been around for a generation,” Brent Weiss, a certified financial planner and cofounder of Facet Wealth, told me. Roth IRAs, for example, first became available in 1998. HSAs entered the scene in the early 2000s. As I started to learn through my conversations with fiscally savvy individuals, an HSA is an incredibly powerful financial tool thanks to its unique triple tax advantage. However, there are some stipulations if you want to use one, starting with the type of health insurance plan you have. What is an HDHP and who do they make sense for? To use an HSA, you have to be enrolled in a high-deductible health plan (HDHP), a type of health insurance that typically has lower monthly premiums but higher out-of-pocket costs. It was introduced in 2001 (a couple of years before HSAs made their debut in 2003) to make health insurance more affordable. While it offers a lower premium (the amount you pay for your health insurance every month), it also comes with a higher deductible as the name suggests. The latter is what you pay out-of-pocket before insurance kicks in. That’s where the HSA comes in handy. The idea is that since you’re not spending a lot on a premium, you have more money to save in an HSA that you can then use toward medical expenses. Think of it as a personal bank account for your medical costs — with incredible tax benefits. Brent Weiss, cofounder of Facet Wealth. Photo courtesy of Brent Weiss Note that an HDHP is not the best choice for everyone. It’s typically well suited for people who are very healthy, don’t plan on seeking medical care frequently, and can afford to pay the deductible upfront if there’s a medical surprise. If you have an existing health issue and see a doctor frequently, or you’re preparing for a major medical expense such as surgery or having kids, this might not be the best plan type for you. Additionally, if you have cash-flow issues, you might want to avoid an HDHP. You need to have the means to make significant savings in an HSA, emphasized Weiss. Switching to an HDHP and contributing to an HSA As a healthy 31-year-old who rarely seeks medical care and has a solid cash cushion, I fall into the category of people who an HDHP makes sense for. I switched to this type of plan at the beginning of 2022 and immediately started contributing to the HSA. For two years, I maxed out the account. The limit for individuals was $3,650 in 2022 and $3,850 in 2023. In 2024, it’s $4,150. I used the funds for occasional copays and prescriptions. I also enjoyed the HSA Store, which is like Amazon for HSA-eligible products like sunscreen, cleansers, Advil, and bandaids. There are some surprisingly eligible products, like electrolyte mix, Epsom salts, and recovery massage guns. Note that if you withdraw money for something other than a qualified medical expense, you’ll pay ordinary income taxes on the withdrawal and owe a 20% early withdrawal penalty — that’s if you’re under 65. After 65, you can use your HSA money to cover any expense without incurring a penalty, but the funds are subject to income tax. I did have one freak accident that resulted in a corneal abrasion. I happily used my HSA money to cover the $1,075 bill. While I used my HSA debit card to spend my funds for simplicity, a smart move would have been to use a credit card to collect rewards and then submit receipts to my provider in order to get reimbursed. An even smarter move would have been to invest my HSA funds (which I eventually did) and not touch them until age 65. Using an HSA like the wealthy: Max out the plan, don’t touch the funds, and let the money grow tax-free After two years of simply saving in an HSA while writing about millionaires who are actually putting that money to work, I decided to do the same. After all, it’s an excellent investment vehicle with a triple tax advantage: You can contribute pretax dollars (reducing your taxable income), your contributions and earnings grow tax-free over time, and you can withdraw your money tax-free to cover qualified medical expenses (including things like copays, lab fees, and vaccines). Weiss, who spent the first decade of his career working mainly with high-income individuals and families refers to it as the “triple tax threat strategy for your money.” His advice to his wealthy clients was: “Max your health-savings account every single year, don’t spend the money in the account, invest that money so it can grow tax-free, and then you can use it at some point in the future for qualified medical expenses tax-free.” He also advised keeping a paper trail of medical receipts: “The amazing thing about an HSA, since it rolls over year over year, is that if you have a big expense and you decide to keep your HSA invested and pay out-of-pocket, there’s no time limit on when you can reimburse yourself.” This strategy isn’t just for the wealthy — I’m using it, after all — but there are some important steps to take before you implement it. “First of all, if you need to use the money in the HSA to cover medical expenses, you don’t want to invest it,” he said. “What you don’t want to happen is, you invest it, the market drops 30%, and you lose 30% of your money, and then have to use it to cover a doctor’s visit for your kid.” The long-established personal finance advice of having an emergency fund before you invest applies here, too. Weiss, who uses an HSA, also recommends keeping some cash in the account that you could easily access for a medical emergency. However much you choose to keep in cash is situational and depends on your risk tolerance, he said. He prefers to keep the one-year deductible in cash. This amount varies by plan — mine, for example, is $2,000. But to be considered an HDHP in 2024, the minimum annual deductible is $1,600. Other people prefer to keep the out-of-pocket max, which is the most you could spend on covered healthcare in a year. Again, this varies by plan — mine is $3,250 — but cannot exceed $8,050 for self-only coverage in 2024. A six-figure difference in retirement funds In early 2024, I requested to move money from my HSA to my HSA investment account. My provider requires me to keep $500 in my cash account, but anything else was fair game to invest in any of the 25 options available to me. I kept the $500 minimum — now that I’ve spoken with Weiss, I’m building that balance up to the one-year deductible amount before I invest more — and transferred about $4,400 into the Vanguard Target Retirement 2050 Fund (VFIFX). The author has been reporting on personal finance for nine years. Kathleen Elkins Selecting an appropriate investment was the most intimidating step of the process, but I figured I couldn’t go wrong with a target-date fund. These types of funds automatically change to more conservative assets as the “target date” — or the date at which you plan to retire — nears. I was relieved when Weiss told me that he also invests his HSA money in a retirement date fund. “I’m not getting fancy. I’m not trying to beat the market,” he said. “It’s a super-simple way to invest your money and not have to worry about it every day, week, month, or quarter.” I asked about how often I should be transferring money from my cash account, where my HSA funds land automatically, to my investment account. He told me not to worry about logging in and initiating a transfer every time I get paid, especially if there are transfer fees. Quarterly or every six months is fine, he said: “The main point is to find the cadence or rhythm that works for you where you know you’re going to stick to it.” I set a reminder on my phone to make quarterly investments, as I don’t want to forget to invest this money. “Health savings accounts are sitting in general bank accounts; they’re not high-yield accounts,” Weiss pointed out, meaning my money is essentially earning zero interest when it’s in the cash account. “If you can invest your money and, conservatively, get 6%, maybe 8% on that money over the next 10, 20 plus years, you’re going to build an order of magnitude greater amount of wealth in that account that will absolutely help you offset the cost of health insurance in the future, especially after you retire.” We’ll use my numbers as an example: My starting balance is $4,400 and I’m contributing the maximum, which comes out to about $345 a month. If I continue to invest that $345 a month into a target date fund, by 2050 (or, in 26 years), I’d have about $265,00 in my account, assuming the “conservative” 6% return Weiss pointed at. Of course, a return is “never guaranteed when you invest,” he added. If I earn 7.67% (the average return of my fund since inception), I’d have $345,000. That number looks a lot different if I simply leave the money in the cash account for 30 years: It would amount to about $112,000, which is a $233,000 difference. Note that, over time, that $345 contribution will increase if the HSA contribution limit set by the IRS continues to increase, meaning my nest egg could be even bigger. Plug your own numbers into a compound interest calculator and see what happens when you invest your money, rather than keeping it in savings. “The difference is significant, and it can really change the retirement projections for families out there,” said Weiss. While I didn’t execute the HSA strategy perfectly — I could have invested my money sooner, and I also should have left a little more cash in the account — I’m on the right track by emulating what the rich do, according to Weiss. “Educate yourself on what the high-earners are doing with their money,” he said, including maxing out HSAs. “People may go, ‘I’m not a high earner yet.’ Or, ‘I’m not wealthy yet.’ And that’s fine. Look at what other successful people doing to create wealth, and if you educate yourself on all those different ideas, you can get a head start on so many other people your age because we generally find out about these things 10 years too late.” [ad_2] Source link Post navigation Here’s How the Best $1,000 I Ever Spent Made Me Richer Got $1,000 to Invest in Stocks? Put It in This ETF.