Whether you’re a fan of the new American Health Care Act (AHCA) or not, there is one valuable benefit in the new AHCA plan. The valuable benefit is increased contributions into a Health Savings Accounts. The contribution limits for Health Savings Accounts (HSA) are set to increase significantly for individuals and families. Below, the table compares the current contribution limits to the proposed contribution limits in the new AHCA.
https://en.wikipedia.org/wiki/American_Health_Care_Act_of_2017
In this post, I will cover:
A quick snapshot for why you should start to invest into an HSA
Who should use an HSA and who shouldn’t use an HSA
Other changes to HSA plans under the AHCA
Some math to show what can happen for you in retirement if you max out your HSA
Why invest with your Health Savings Account?
Many companies offer an HSA as an option in their medical plan for their employees to choose from. In general, HSAs have a lower monthly premium compared to other plans an employer may offer. However, with an HSA the employee is responsible for covering all medical expenses until the deductible is met.
Related: What is an HSA and Why should you use it?
Your Health Savings Account, in my opinion, is currently one of the best investment vehicles for retirement. Other bloggers that are much smarter than me agree that it can be an excellent investment vehicle. These notable bloggers and news sites include:
Mad Fientist
Scott Alan Turner
Financial Panther
Physician on Fire
CNBC
Here are the quadruple tax advantages offered by an HSA.
1) Claim a tax deduction for your contributions
2) Invest the money in your HSA and the gains grow TAX-FREE!
3) You can pull the money out tax-free for qualified medical expenses at any time
4) No FICA taxes with direct deposit
Related: Health Savings Accounts offer a quadruple tax advantage.
Others are doing it
Now I’m not a follow the band wagon type guy. But, the chart below from Devenir Research depicts significant growth in total HSA assets since 2006. Not only are more people contributing to their HSA accounts, but more money is being invested within these HSA accounts. I keep enough money in cash to cover my deductible, and I invest the rest of the money.
Risks:
You have no control over what the government might do. Maybe they abolish the current tax benefits for HSAs?
You need to search for low-cost investment options. Some plans have investment options with high fees that could cost you significantly over the long term.
A medical emergency could come up that could quickly deplete your HSA funds. However, if you’ve saved the money to cover an unfortunate event, you have planned well.
Who should use an HSA?
If you are a young person that is in good health and you don’t plan to visit the Doctor. You want time to build up your Health Savings Account, so you have money when you need it. Much like an emergency fund, you can think of an HSA as an emergency fund specific to medical care.
You are a super saver, and you can afford to cover some or all medical expenses out-of-pocket. Thus, enabling you to maximize your HSA as a retirement vehicle.
You’re like me, and an HSA is your only option. The U.S. mandates that you have health insurance.
Who shouldn’t use an HSA?
If you have a young family, or you plan to have kids this calendar year, you may want to consider NOT enrolling into an HSA. The mother and child will likely meet the maximum out-of-pocket. I know speaking from experience ?
HSA deductibles can be as high as $13,100 for a family plan. If you don’t have the cash to cover your deductible you may be in trouble.
Are working to eliminate debt? Go with another plan that is cheaper until your debt is under control.
Finally, if you have an awesome health plan at work that is cost effective and provides excellent coverage, stick with that plan and invest more money into your other investment accounts. Maxing those out? Start a taxable account.
New Benefits for HSAs from the AHCA
Both spouses can make catch-up contributions to one HSA beginning in 2018.
The tax penalty is lowered from 20 percent to 10 percent for unqualified medical expenses.
Letting people use their HSAs to pay for over-the-counter medications (currently restricted under the Affordable Care Act.)
How to choose investment options
I want to close today’s post reviewing a few scenarios. For each scenario, consider a college graduate that is 23. The graduate was exposed to the personal finance community, and they wanted to achieve financial independence by age 40. If they were able to max out their retirement accounts for 17 years, and they received a 5% return on their investment, they would be close to a millionaire by age 40. Below is the details running a future value calculation in Excel
If they were able to max out their retirement accounts for 17 years, and they received a 5% return on their investment, they would be close to a millionaire by age 40. Maybe the college graduate could retire then and pursue things they are passionate about? Below are the details running a future value calculation in Excel:
Let’s consider the same college graduate working for an extra five years. Now, we see the power of compounding interest start to take effect. Over the five years, another $500k is added to the college graduates portfolio.
Maybe they love working. By age 60, the college graduate would have a healthy $3.7 million in their retirement portfolio.
These scenarios are projections, but they display the power of investing early and often. It is not too late to get started. Do not be afraid to invest, embrace investing so you can work toward financial independence. Once you are financially independent, you can start making decisions based on what is best for you and your family.
