What is an HSA Health Savings Account?

An HSA (Health Savings Account) is very similar to an IRA, but is primarily intended to cover health care expenses rather than to provide retirement income.  An HSA is one of the most tax-advantaged vehicles available in that it is “triple tax exempt”:

  1. Contributions into the account are tax-deductible
  2. Gains and dividends on investments in the account grow and compound without annual tax.  This is called “tax-deferred”, but best of all…
  3. Withdrawals are also tax-free if used for qualified medical expenses, at any age

HDHP requirements for contributing to an HSA

Just as an IRA requires you to have earned income to contribute, the IRS requires those who make tax-deductible contributions to HSA accounts be enrolled in a “high-deductible health plan” (HDHP), which means your health insurance plan requires you to pay out of pocket at least US$1,350 per individual (or $2,700 per family) before the health insurance kicks in and pays the rest of your larger medical bills.  This is good in encouraging health insurance to actually insure against large, unexpected medical bills, while using a tax-advantaged savings account to pay for smaller medical expenses with cash.

I have often praised the international health insurance plan I bought for myself and my kids with a deductible of HK$25,000 (around US$3,000) each, but with coverage of US$23.8 million (around US$3 million), which should even cover an expensive US hospital visit should I be unfortunate enough to need one.

How to use an HSA to supplement an IRA or 401(k) retirement account

A side advantage of an HSA is that withdrawals can be taken without penalty and by paying ordinary income taxes after your 65th birthday, meaning your HSA account can serve as a supplemental traditional IRA should you be fortunate enough to not have to spend it on medical expenses before age 65.  (Source: page 9 of IRS pub 969).

The up-front tax deduction is especially valuable to those in high tax brackets who have already taken the maximum deductions on IRA contributions (in 2018: US$5,500, or $6,500 for those aged 50+), but allowing an additional contribution of $3,450 for individuals or $6,900 for families in 2018.  This HSA maximum contribution limits may still seem small, but I wrote earlier how even a few hundred dollars per month invested consistently can add up to over a million dollars.

How do I open an HSA?

Unlike IRA accounts, the providers of HSA accounts are still very limited, but there are a few you can find online, or you can contact us to set up a GFM-managed HSA with our recommended provider.