Why Isn’t Everyone Using this Triple Tax Play?

October 14, 2019

Why Isn’t Everyone Using this Triple Tax Play?

This poorly understood and underutilized opportunity isn’t just a triple play, it’s a home run for retirement savings. An HSA, or Health Savings Account, packs a wallop—it is pre-tax (or tax deductible) money that doesn’t count toward your taxable income, which means all the associated taxes are not levied. Any growth in the account also is not taxed. As long as the money is used for qualified medical expenses, withdrawals are never taxed. If your employer also contributes, that’s an extra bonus.

So why aren’t financial advisors recommending this strategy to everyone? Unfortunately, HSA’s don’t provide a financial incentive for them to do so. Contributing to an HSA only diverts investable assets from revenue-generating investment accounts. You owe it to yourself to understand how these accounts work so you can make the most of your nest egg.
Consider the potential tax savings on a $7,000 pre-tax annual contribution through an employer cafeteria plan:

Federal Income Tax (24% bracket) $1,680.00
Social Security (6.2%) $. 434.00
Medicare (1.45%) $. 101.50
State Income Tax (average 6%) $. 420.00
TOTAL TAX SAVINGS on $7,000 CONTRIBUTION $2,635.50

Imagine how those savings can grow over time. If a family contributed the maximum each year for just 10 years and invested the tax savings at a modest 3% a year, those savings alone would amount to $30,200! That’s over and above the $70,000 they contributed to the account and the investment gains on those funds.
What keeps many people from making the most of these benefits is thinking they may not have enough unreimbursed medical expenses to use the money. Don’t forget that medical expenses as we get older only increase. The bigger issue is they’re only seeing the account as one-dimensional.

Maximize the potential of an HSA by treating it more like a 401k. If your employer kicks in a partial match, contributing at least that much is a no-brainer. For 2019, singles can contribute up to $3,500 annually; for those filing jointly, the maximum is $7,000. Plan to save, rather than withdraw, the money that grows in your account. Be sure to save your unreimbursed medical receipts, because they’re important documentation you’ll need when it comes time to use funds down the road. Take advantage of the investment offerings within the account to help it grow over time. Pay for current medical expenses with a credit card that offers rewards for another bonus.

While it’s better to leave the account to grow as long as you can, life can get in the way. If you run into unexpected expenses that you can’t cover with your income, or maybe a job loss, the
HSA is there to save the day, and withdrawals could be much simpler and tax-free, unlike a loan or withdrawal from your 401k. That’s where the receipts you’ve been saving come in handy. If
you don’t experience these kinds of setbacks, the account continues to grow for your future. As with any retirement account, a little pain now pays big dividends in retirement. Think about
your retirement savings strategy in a new light. Once you contribute enough to obtain the full employer match in your 401k, it’s smart to consider making HSA contributions the next priority.
Remember, though, that no financial decision should be made in a vacuum. To make the most of your entire financial picture, consult an independent financial planner who can help you
assess if an HSA is right for you.