health savings accounts

The One Account That Every Millennial Should Consider

One of the best investments you can make, with incredible tax-fighting potential, is something many people overlook or don’t even know about.

If you’re suspecting that I’ve got an obscure cryptocurrency or robo account to flaunt … fear not. Every millennial need look no further than an ordinary health savings account (HSA).

The HSA may very well be the most powerful tax shelter, pound-for-pound, in the United States. Unfortunately, not everyone is eligible to contribute to an HSA. Let’s cover the basics and review how you could supercharge your savings with an HSA strategy.

What is an HSA?

An HSA is a savings account that allows you to save pre-tax to pay for qualified medical expenses. Savings within the HSA can be invested, and your investment earnings grow tax deferred. Best of all, when paying for any qualified medical expenses, withdrawals can be made tax-free. The unique triple-tax advantage of the HSA is truly one-of-a-kind and just about the only way individuals can use income for personal use without the IRS touching a single dollar.*

This is no small thing. Most tax-advantaged savings plans give you a take break now OR a tax break later. An HSA gives you both!

Unfortunately, not everyone can contribute. The IRS only allows people with high-deductible health plans (HDHPs) to participate with an HSA. To be eligible in 2022, individuals must have a health plan deductible of at least $1,400, and the out-of-pocket maximum must be below $7,050. A family health plan must have a deductible of at least $2,800, and the out-of-pocket maximum must be below $14,100. These requirements are not particularly high, so many individuals will find themselves eligible.

How Do They Work?

If you meet the criteria to contribute you can start funding an HSA. If your employer does not offer an HSA, you’re allowed to open your own independently. There are many providers to choose from.

Next, consider the contribution limits. The tax benefits are so powerful that the IRS puts strict limits on what you’re allowed to contribute. In 2022, individuals can contribute up to $3,650 per year and families can contribute $7,300 per year. If you’re 55 or older, you can add an additional $1,000 “catch-up” contribution on top.

Remember, your current year contribution counts as a tax deduction. Once funded you can choose among various savings, mutual funds and ETF options to get your money to work.

How to ‘Supercharge’ an HSA

Health costs are inflating between 6% and 7%. The average millennial often feels bulletproof and rarely worries about future health costs. But time remains undefeated, and one day these costs will demand your attention. 

Generally, to take advantage of the aforementioned tax benefits, you’ll need to use your HSA funds to pay for some medical expenses. As an example, when you visit your doctor you can use an HSA-linked debit card to cover the cost of your $20 co-pay.

Here’s a trick to keep up your sleeve. Consider paying for some of your medical expenses, particularly the smaller ones, from your bank account instead. You’re allowed to document that same expense with a receipt, paid invoice, etc., and deduct that expense from your HSA in a future year. Guess what? That old bill will never increase, but your invested HSA can! By deferring the expense, your HSA’s energy can focus on growth. When you do finally get around to reconciling those past bills, the withdrawals will amount to a smaller percentage of the now-inflated whole.

This little maneuver may eventually be closed by the IRS. Until then, orderly record keepers can get some extra mileage out of their HSAs!

The Bottom Line

All of the above, of course, assumes that you have the financial means and cashflow to utilize a strategy like this … and the reality is many millennials do not. Student debt is at record levels, home prices are soaring, the cost to start a family and raise children is exorbitant.

If you can’t max out an account like this or utilize this supercharged strategy, I’d still urge you to consider doing something. Start saving, keep doing research and continue doing what you can to best prepare for your own financial freedom and security.

* It’s also worth noting that if you take a distribution out that is not deemed to be for qualified medical you will owe ordinary income tax and potentially contend with an additional 20% tax. The additional 20% tax goes away after reaching age 65, upon death and upon disability, www.irs.gov/publications/p969).

About the Author

Justin Champlain, CFP®

Financial Planner, Arcadia Financial Group

Justin Champlain joined Arcadia Financial Group in September 2018. Prior to joining the firm, Justin worked at Goldman Sachs and Brown Brothers Harriman. He holds a Bachelor of Arts in economics from St. Lawrence University and received his CERTIFIED FINANCIAL PLANNER™ (CFP®) designation through Boston University. Justin lives in Groveland, Massachusetts, with his wife and dog. He enjoys boating, skiing and watching New England sports teams.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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