HSAs 101: How to Make Money While Securing Your Future Health

In light of the coronavirus pandemic, more people are starting to take an in-depth look at their preparedness to cover unexpected medical expenses. While many of us purchase health insurance and set aside reserves for this purpose, the money paid into these accounts is not liquid or accessible for you to invest.

If you’re looking for a way to help cover the costs of medical expenses while also generating income, consider utilizing a Health Savings Account (HSA).

I have used this type of account since 2011, because it enables me to cover the cost of glasses, dental procedures, deductibles, and more, all from a tax-free account that yields impressive returns.

The HSA is a type of trust, so it can accumulate contributions and earnings over a period of time, unlike a Flexible Savings Account (FSA) in which you have to spend all of the money earned in the account each calendar year. You can even invest in assets like real estate in an HSA and generate income from rental properties. The money accumulated in this type of account can be saved for rising health care costs that accompany retirement and later life.

So how does this account type work and who qualifies?

To start building wealth within an HSA, you will need to know the basics. Before getting started, there are three major benefits you should be aware of.

3 Benefits of Health Savings Accounts

1. Tax Advantages

HSAs can be BOTH tax-deferred and tax-free. The money you contribute to an HSA is tax-deductible, but it is not taxed when you withdraw it. These withdrawals, however, must be for a qualified medical expense in order to be considered tax-free.

You are able to use your HSA to invest in the wide range of alternative assets provided to any self-directed IRA, including real estate, gold and silver, private placements, mortgage notes, and more. The income generated from these investments can be used for qualified medical expenses, such as prescription drugs, insulin, physician visits, hospital fees, and other out-of-pocket medical and dental procedures.

I bought a discounted note in my HSA for $50,000, and the face value of that note was $70,000. Currently, the note is making 8% on 70,000 for 20 years, so I get regular interest checks in my account with the borrower’s payments. I have used the funds from these interest payments to pay fees when I visit the doctor. That note will continue to earn interest until it is re-financed or over the full course of 20 years, giving me enough savings to withdraw for medical procedures and payments that I will need now or later in life.

2. No Time Limit for Reimbursement

With an HSA, the time to be reimbursed for your medical expenditures is in your control. Whatever is spent out of pocket can be taken from your account years later. The money in this account will have earned interest, and will be tax-free when it comes time to use it.

For example, a 45-year-old has a high deductible health plan, opens and HSA, and invests $2,000 a year for 10 years. This compounds at 6%. That person turns 55; their $20,000 has grown to $30,000. At age 46, the investor paid $6,5000 out of pocket for dental work, contacts, prescriptions, and a chiropractor. Because the account holder kept a detailed record of each qualified medical expense, they were able to withdraw that $6,500 from their HSA without any taxes or penalties at age 55, ten years away from retirement.

You should keep excellent records of your qualified medical expenses. This ensures that your withdrawals are not subject to income taxes. In the rare instance your account gets audited and you cannot prove the qualified medical expenses in your account, you are subject to those taxes, and if you’re under 65, you will be penalized an additional 20% on top of the taxes for any unqualified medical expenses.

3. Less Penalties

After you turn 65, there is no penalty for withdrawing funds for non-qualified expenses.

Though you’ll have to pay regular income taxes on your withdrawals when you reach 65, this rule applies to Traditional, tax-deferred accounts anyway. The difference? You will have a nice-sized fund for current qualified medical expenses that you have grown over time and can now withdraw tax-free.

In the event of the account holder’s passing, an HSA can be passed on to a spouse who can continue to use the account as an HSA. Any beneficiary who is not a spouse will pay the going income tax rates, and will not be penalized if under 65.

Whatever doesn’t get used for these qualified purchases gets treated like a traditional retirement account.

As an employee of a company that offers the HSA as an option, you are entitled to significant tax advantages. HSA regulations are designed to provide individuals with assistance to manage the rising costs of healthcare. Additional benefits as an employee include: contributions being withheld from your paycheck with pre-tax dollars to reduce your taxable income, and employers who offer high-deductible plans being permitted to contribute to their employees’ HSAs to offset higher annual deductibles. Even if you change health plans and are no longer eligible for the HSA, the account is still yours (you just can’t contribute to it).

Who Qualifies for an HSA?

Now that you know the benefits of an HSA, let’s move on to what qualifications are required to be eligible for this type of account:

In order to open and contribute to an HSA, you must...

• - Be enrolled in a high-deductible health plan.
• - Not be claimed as a dependent on anyone’s tax return
• - Not be covered by another major medical health insurance policy (some exclusions apply)

To open and contribute to an HSA, you must be enrolled in a High-Deductible Health Plan (HDHP) that has a minimum annual deductible for individuals and families. If you are employed by a company that offers a HDHP, you can delay enrolling in Medicare to maximize your benefits. However, since there are no income limits associated with HSAs, you are able to open one even if you make more money than the contribution limits for other accounts. The 2020 contribution limit for HSAs are $3,550 for an individual and $7,100 for families.

For highly-compensated employees with this type of health coverage, an HSA is a great vehicle for planning ahead and securing not only your financial wealth, but also your future health.

Questions about owning real estate or other investments in an HSA? Comment below!