This guest post was originally written by Greg Phelps, CFP® and updated by me (Brad Kingsley, CFP®). This excellent article on leveraging a Health Savings Account for retirement can save you a ton of money in taxes. This is definitely worth reading!
A triple-tax-free million dollar retirement plan?
This is by far one of my favorite money tricks. Most investors haven’t yet taken advantage of it, and when they do they’re not using it properly. I mean, who gets a “triple-tax-free anything” in life? You know the old saying—“The only 2 certainties in life are death and taxes.”
Recently I interviewed Garrett Prom, CFP®, EA, CRPC® for the Wealth Summit. Garrett is an expert at using the Health Savings Account for retirement income and tax planning.
Together we dug into this concept of a triple-tax-free million-dollar retirement plan. A relatively simple concept that certainly sounds catchy!
Here’s how it works
The current Health Savings Account (which I call the “medical IRA”) provides a tax deduction when you fund it. The family contribution is limited to $7,100 per year (2020).
If you’re in a 22% tax bracket, you’ll save $1,562 in taxes right off the bat! That’s not a bad start at all.
Note from Brad: That’s just a federal income tax example. When you add state income tax savings into the mix (an additional 7% in South Carolina) you can often save over $2,000 on taxes from your family HSA contribution!
The HSA contribution limit grows with inflation over time just like any other IRA or 401k limit. Garrett used a reasonable 2% per year increase for inflation.
Many Health Savings Accounts allow you to invest your balance. Some of them even provide access to some great low-cost no-load mutual funds from companies like Vanguard. Always look for low-cost investment options when building a long term investment portfolio.
Optum Bank, HSA Bank, and Lively are good places to open your HSA. They both allow you to invest your money in Vanguard mutual funds. [Note from Brad – I personally use Lively and have had a very good experience with them. They let you link to TD Ameritrade and invest your funds however you like!]
While you should always diversify your investment portfolio, typically your more aggressive investments should be placed in your Health Savings Accounts first. Balance the remainder of your investments into a well-rounded overall plan, with your higher risk and higher potential return mutual funds in accounts like Roth IRA’s and this HSA strategy.
Assuming an 8% annual growth rate, that $7,100 contribution each year (about $592 a month) increased with inflation turns into more than 1 million dollars after 30 years. Check it out:
Not too tricky so far. If you invest $7,100 per year for 30 years at 8% and grow your yearly contribution at 2%, you end up with over 1 million dollars.
The tax benefits are another story altogether (and honestly why this is such a cool strategy). If you’re in the 22% tax bracket, you’ll save over $60,000 in taxes along the way! Now we’re talking some real money.
Is there a catch?
First, you must qualify for a Health Savings Account. The easiest way to ensure you’re eligible is to call your health insurance provider and simply ask, “Does my health insurance pla