Make the Most of Your HSA

Low-Cost Asset Investing Can Help You Maximize Your HSA Account’s Potential

Patricia McCrystal

July 27th, 2015

An HSA, or Health Savings Account, provides those with High Deductible Health Plans (HDHPs) an avenue to save and invest money for all present and future qualified medical expenses, or QMEs. HSAs were approved by Congress in 2003 during one of the most intensive governmental interventions in medicine in 40 years. The intent behind the inception of HSAs is to allow participants of HDHPs to pay out-of-pocket qualified medical expenses, with tax benefits, until their deductible kicks in.

One of the main perks of an HSA account is that contributions aren’t taxed when they go into the account, and funds aren’t taxed when you take a distribution either. In addition, unlike Health Reimbursement Accounts (HRAs) which are employer-controlled, or Flexible Spending Accounts (FSAs) which offer funding on a “use-it-or-lose-it” basis, once contributions have been made into the account, it stays open and retains the money until the account holder takes distribution of the funds – regardless of whether the account holder is still employed by the employer who offered the HSA account.

Although many HSA account holders are comfortable reimbursing themselves for QMEs and taking advantage of the “discount” associated with tax-free distributions, few are knowledgeable about the benefits of investing their funds to potentially grow their account profits. This lack of awareness most often stems from the fact that there are not many HSA providers that allow account holders to invest their HSAs, and even fewer who allow account holders to invest outside of the securities market. When an HSA account is held with a provider that allows only a narrow list of investment choices (if any at all), typically the rate of growth on these accounts is minimal over time. It’s no surprise that many HSA holders don’t see the benefit of saving  their HSA funds if they never see any real growth in their account from their limited investments.

However, investing in low-cost assets with a self-directed HSA account offers account holders the opportunity to potentially make some real money over time. Self-directed HSAs offer the most investing options; and you may be surprised by how many options are available to HSA investors. Because annual contribution limits of an HSA are lower than those of a 401(k) – the HSA yearly contribution limit is $3,350 a year for individual HDHP coverage, and $6,650 a year for family coverage (including employer contributions), while 401(k) yearly contributions top off at $53,000 (including employee and employer contributions) – investing your HSA account in low-cost assets can help your account realize greater profits, which means less out-of-pocket spending for health expenses.

It’s common for employers to offer HSAs through a provider that offers a very limited scope of investing options for their account. Consequently, many investors will open a second HSA account with a provider that allows for alternative asset investing, such as New Direction IRA. From here, investors can turn to an almost limitless array of low-cost alternative assets that can potentially bring the account holder a sizeable return on their investments.

As HSAs have continued to grow in popularity and average sum being saved, technology has evolved to provide account holders with more online market places for relevant services; including crowdfunding and locating asset providers. One route for HSA investing is peer-to-peer lending. This type of lending allows investors to sort through consumer loan listings and pick those that best fit their investing interests. Borrowers then make fixed monthly payments to the investor’s HSA account, which can be used for QMEs.

In a similar vein, HSA holders can originate their own loans. They can also invest in private equity opportunities, such as buying private stock in a friend’s promising new upstart, or in a qualified family member’s solar energy enterprise (be mindful of disqualified persons/prohibited transactions for HSAs).

There is a wide variety of real estate options in which HSA holders can invest their account funds. Investors can finance a personal fix-and-flip project, or fund a real estate venture of a friend’s. HSA holders can also look into investing in a private real estate fund. These funds can vary widely in regards to asset type, minimums, date of distribution, and more; giving investors plenty of flexibility to define the terms of the investment that they choose. An HSA can also invest in tax liens, which are state and property specific regarding rate of interest and other regulations.

A few stipulations: your HSA can only be used for medical-related expenses, otherwise you’ll have to pay regular income taxes on the distribution on top of a 20% penalty. Investors can’t open an HSA if they are on Medicare, or are a dependent of another’s health insurance plan.

Despite these caveats, your HSA can be a powerful tool to grow your savings for present and future medical expenses, especially through informed alternative-asset investing. Contact a self-directed HSA provider like New Direction IRA to move forward with investing your HSA funds today!

Take the Savings to the Next Step with Your HSA

Do you really know how to use your Health Savings Account?  Most people don’t.  A large number of people who have HSAs use them as “health spending accounts,” and “spending” is the opposite of “saving.” HSA owners aren’t at fault for not maximizing their HSAs’ potential, though.  There simply isn’t a great deal of information available on what they can really.

On the one hand, more of you are probably familiar with Health Reimbursement Accounts (HRAs) or Flexible Spending Accounts (FSAs).  The drawback to having access to HRA or FSA funds is that they work on a “use-it-or-lose-it” basis.  Whatever you don’t spend, you lose.  People who transition from HRAs or FSAs to HSAs are conditioned to spend.

If you’ve done some basic reading on them you probably know that HSAs don’t work the same way.  These articles will tell you that whatever money is left over at the end of the year “rolls over” to the next. That sounds great if you’re accustomed to forfeit anything you don’t spend.  

There are two problems with how those sources discuss HSAs.  First, they present them in the same light as HRAs or FSAs, except, they state, unused funds “roll over”.  Let’s be clear: an HSA is not like an HRA or FSA. The funds in a Health Savings Account are yours, not part of a company’s health benefits.  Unused dollars don’t “roll over” from one year to the next like unused vacation.  In fact, an HSA is more like an IRA, but for medical expenses.  That is, the money is yours, and it can go where you tell it.

The second problem with most information circulating about HSAs is the notion of “left-over funds”.  These sources take spending the money in your HSA as a given.  Any little bit left over can go in the bank. This is certainly an option, but it doesn’t exactly maximize the HSA’s potential. 

Before discussing how you might maximize your HSA, let’s take a quick look at what an HSA actually is and how it works.  First, you do have to be covered by a High Deductible Health Plan (HDHP) to make contributions to your HSA, but the money continues to be yours even after you’re no longer covered by the HDHP. Then, you establish a Health Savings Account, which is an IRS-designated custodial account that offers tax-deductible contributions and tax-free distributions for qualified medical expenses.  That is, money goes in tax-free and money comes out tax-free out money.  Money you don’t have to pay taxes on, ever. CAVEAT LECTOR: if you take money out of your HSA for anything other than a qualified medical expense before you’re 65 years old, Uncle Sam imposes taxes and a 20% penalty.  After you’re 65, the HSA can act like a Traditional IRA.  That means that distributions for qualified medical expenses are still tax-free, but distributions for other things – dream vacation to the Cayman Islands, perhaps – work just like distributions from a Traditional IRA.  You pay income tax on the amount distributed, but no penalty.

Importantly, you don’t have to spend the funds in your HSA according to someone else’s schedule; you can save them. If you have low medical costs, and you’re able to cover them out-of-pocket, you can leave the funds in the HSA, to grow tax-free.  You can even reimburse yourself later as long as the expense was incurred after you established the HSA.

Not spending the money in your HSA is a sound saving strategy, but with current interest rates hovering around “abysmally low” for savings accounts, it’s not likely to put your hard-earned money to work.  However, while the ability to contribute to an HSA ceases when HDHP coverage stops, the ability to invest doesn’t.  As mentioned above, HSAs work much like IRAs – the money is yours, and you can invest it.  Of course, stocks, bonds, and mutual funds can make up part of your HSA portfolio, but they don’t have to make up all of it.

Your HSA can invest in all the things the IRS allows for IRAs, and a Self-Directed IRA provider like New Direction IRA can help you establish an HSA investing in real estate, precious metals, private equity, private lending…the list goes on.  In fact, except for life insurance, collectibles, and any prohibited transaction involving self-dealing, your only real limit is your creativity.  You can use your personal expertise with your HSA. The returns on these investments certainly have the potential to be much higher than a savings account’s annual yield. 

Given that the projected costs of post-retirement health care for someone retiring now exceed $250,000, an investment vehicle with the potential for high returns coupled with tax-free distributions for qualified medical expenses is a valuable tool.

What if you’re currently covered by an HDHP and want to make sure you can pay the amount of your annual deductible, but you want the rest of the money to work for your future?  You can have more than one HSA, and you can transfer funds between them, much like an IRA.  That means you could have one “cash” HSA where you keep the amount of your yearly deductible in the event of an emergency, and a long-term investment HSA that you use to build wealth for your future medical expenses, long-term care needs, and as a supplemental source of retirement income if needed.

Stop using your HSA solely as a “health spending account,” and make it a true Health Savings Account…or better yet, a “health investment account.”  

The Million Dollar HSA

Despite being around for 10 years, HSAs are not commonly used as a method of saving for retirement even though they have incredible tax benefits. Not only do contributions reduce taxable income and earnings do not incur taxes, but qualified distributions are also not taxed. A recent article by Paul Fronstin in “Notes” highlighted not only these benefits, but how you can use your HSA to save up an incredible amount of money for your retirement. The most striking part of the article explains how, under the right circumstances, you could end up with a million dollar HSA by the age of 65. Believe it or not, this is NOT completely unrealistic. If you start contributing to an individual HSA at the age of 25 and make the maximum contribution each year, projecting the increase in contribution limits over time, with proper investing, your HSA could be worth $1.1 million and you could save up to $420,000 in federal income taxes.

It is important to understand not only the advantages to an HSA but also its limitations. Keep in mind, you only qualify to contribute to an HSA if you are currently enrolled in a high deductible health plan and you do not benefit from an additional health plan that is not HSA-eligible. If you enroll in Medicare, you can no longer contribute to an HSA. It is also important to consider that if you take a non-qualified distribution (one not to pay for qualified medical expenses), the distribution is not only taxed, but also is subject to a 20% penalty.

You CAN, however, always withdraw from an HSA even if you don’t qualify to contribute to one, meaning that if your health care plan changes, you do not need to close your HSA account. You can also continue to contribute to an HSA no matter what age you are, and you are never required to take required minimum distributions. There are no income restrictions preventing you from opening an HSA, and you can contribute even if you are not drawing a salary. You may also take a distribution regardless of your age as long as it is to pay for a qualified medical expense. All these attributes make the HSA a unique retirement savings tool, because though it is very different from other retirement accounts in terms of age restrictions and distributions, it follows the same rules as more common retirement accounts when it comes to investing.

The $1.1 million HSA calculation was based on high yield investments (about 7.5%). As many of you know, this is an unusually high return to find in traditional investments such as stocks and mutual funds, especially when taken over 30+ years. This is where self directed assets can give you the edge. There are people investing their retirement accounts AND HSAs in real estate, promissory notes, gold, and other non-traditional assets. If you have a traditional retirement account that doesn’t quite have enough money to buy that investment property you have your eye on, you can partner it with the funds in your HSA! Make your retirement money go further and use your HSA to its best advantage.

Healthcare and HSA Reminders

Whether you have health insurance or not, it’s important to stay abreast of the major changes that have occurred to the healthcare system in the wake of the Affordable Care Act—also known as Obamacare. Fortunately, the IRS has issued four reminders to Americans as they go forward. After each reminder, I’ve added a short bit of additional information and commentary.

1. Most people already have qualified health insurance coverage and will not need to do anything more than maintain qualified coverage throughout 2014. Indeed, many employers offer health insurance that fits the requirements set by the Affordable Care Act. If your employer offers an acceptable plan and you do not take it, you will be mandated to register for health insurance or, eventually, pay a penalty fee.

2. If you do not have health insurance through your job or a government plan, you may be able to buy it through the Health Insurance Marketplace. Using the marketplace, accessible at healthcare.gov, is a new tool launched by the government to help Americans find the insurance plan that works best for them. The deadline to sign up for 2014 has passed, but you can still browse plans for next year on the Marketplace.

3. If you buy your insurance through the Marketplace, you may be eligible for an advance premium tax credit to lower your out-of-pocket monthly premiums. Tax credits and subsidies are a major part of the Affordable Care Act. By offering ways to lower premiums and expenses, the government is encouraging Americans to get covered. You must meet certain requirements including whether your employer offers a plan and how much money you make.

4. Your 2014 tax return will ask if you had insurance coverage or qualified for an exemption.  If not, you may owe a shared responsibility payment when you file in 2015.

The IRS issues tips and reminders periodically and you can browse them by visiting www.IRS.gov. IF you have questions about health insurance or about Health Savings Accounts (HSAs), visit www.ndira.com.

2014 IRA Contribution Limits and HSA Contribution Limits

The IRS has issued 2014 contribution limits for IRAs and HSAs. Take a look below to see what you’ll be able to contribute to your account(s) this year.

The annual contribution limit for IRAs is $5,500 for 2014, which is unchanged from 2013. The additional catchup limit for individuals 50 and older is still $1,000.

The annual contribution limit for 401(k) plans—as well as 403(b) and most 457 plans—will remain unchanged at $17,500. The catchup contribution limit of $5,500 for 401(k) owners over the age of 50 also stays the same from 2013.

It’s important to note that Individual 401(k)s must be established by the end of 2013 in order for contributions to be made to the account for 2013. Contributions as the employer to an Individual 401(k) for 2013 can be made through the extended deadline of the company’s tax return, either Sept. 15 or Oct. 15. Employee deferrals are typically made per paycheck (unless a self-employed individual does not receive regular paychecks, in which case other filing rules apply.)

Health Savings Account (HSA) contribution limits grew slightly to $3,300 for individual plans and $6,550 for family plans. HSA catch-up contribution limits remained unchanged at $1,000 per year for HSA account holders over the age of 55.

Maximum out-of-pocket expenses for High Deductible Health Plans (HDHPs) were heightened slightly to $6,350 for individuals and $12,700 for families. There was no change in HDHP minimum deductibles ($1,250/individuals and $2,500/families).

Remember that anyone can contribute to your HSA. That means if an HSA holder cannot afford to contribute $3,300 to his account this year, a friend or relative can contribute to his account. However, an account can only receive up to the contribution limit in a given year, no matter who or how many people contribute to it.

For more information on IRA and HSA 2014 contribution limits, visit www.NewDirectionIRA.com.

Using the HSA for Long-Term Medical Expenses

A Health Savings Account, or HSA, is a valuable tool in managing medical expenses. They can help you save, pay for certain expenses not covered by your insurance and you can reimburse yourself at any time in the future for medical expenses you incur while the HSA is open.

First, let’s look at Qualified Medical Expenses, or QMEs.

The HSA can be used to pay for QMEs that are not covered by your HDHP. QMEs are medical expenses the IRS allows HSAs to pay, including (but not limited to) dentist and optometrist visits, eyeglasses, transportation to medical care, chiropractic care and much more. The best part is that these expenses can be paid tax-free with the HSA. QMEs include expenses of the individual, their spouse and dependents regardless of their medical insurance coverage.

Secondly, your HSA can reimburse you for QMEs at any time. You decide. You can take a reimbursement the day you incur the medical expense or 30 years in the future. Regardless of when you take the QME reimbursement, it is tax free.

Say you go to the doctor for a checkup and get a bill for $1,000. With an HSA, you can pay that bill with your HSA funds immediately, or you can pay the bill out of pocket, keep the receipt, and reimburse yourself that $1,00 anytime, tax-free, in the future. That gives you $1,00 more dollars in your HAS to invest, which will hopefully appreciate over time.

Note that your HSA cannot pay for medical expenses incurred before the account is opened, but it can reimburse for any expense after that even if the account does not have that amount in it at the time.

Lastly, any withdrawals are subject to ordinary income tax, just like traditional IRAs. So if you and your dependents are fortunate enough to not have medical expenses but you need the money for non-medical expenses after age 65, the HSA works in your favor by letting you keep that money in the account.

There are no Required Minimum Distributions (RMDs) for HSAs. That means you may continue to make contributions as long as you are not enrolled in Medicare. When you die, your HSA funds can be used by your spouse or it can be taxed and pass on to your non-spouse beneficiaries.

Alternative assets in an HSA

At New Direction the focus, rather than selling or recommending investments, is to help the clients learn about their options and guide the client through the process of making it happen. Co-founder and CEO Bill Humphrey said, “Self Direction is not for everyone. The self directed investor must be willing to take the responsibility for investment choices. Although their outside advisers or associates can help. Since we don’t sell any investments, we don’t question your choices or try and steer your decisions. Our clients already have the sexiest IRAs on the block.” New Direction offers Roth and Traditional IRAs, SEP IRAs, as well as 401k plans.

Humphrey warns clients and potential clients not to overlook the HSA for retirement expenses of the medical variety. Creative investors are discovering the investment potential of HSA funds and some clients feel that the tax shelter of an HSA can be better than either a Roth or Traditional IRA. New Direction includes Self Directed Health Savings Accounts in the available plans, Humphrey explained, because many employers are now offering plans in conjunction with HSA contributions.

Most investors look at an IRA as a long term investment, and recently, according to New Direction, more HSA investors are doing the same thing. As mentioned in the WSJ article, investors in hardwood trees are looking for a long term return. Humphrey said, “Our clients mention the low initial amount required as one of their reasons for making the investment aiming that the trees will ‘grow’ in value between now and retirement.”

A New Direction HSA can purchase Hawaiian Koa trees or whatever investment they choose, and harvest future profits. Those profits are never subject to tax, provided distributions are used for qualified medical expenses. And HSA contributions are not subject to tax either. Thus, HSAs offer tax free contributions and distributions as well. Account holders generally defer distributions from HSAs to retirement years while allowing the account to grow in the meantime.

Given the lower typical balances in HSAs, the focus is often on lower priced investments. Small plan balances don’t necessarily limit the client to small investments. HSAs and IRAs with low balances may also, as mentioned in the WSJ article, make purchases with other investors or using debt leverage.
Since 2003, New Direction has focused on education of investors on the details of the process and rules. They teach hundreds of free webinars and classes to educate both new and experienced investors how the take advantage of a self directed plan. Through their professional training classes for CPA and others, the details of tax treatment of profits of the plan and any UBIT (unrelated business income tax) are also addressed.

New Direction IRA, Inc., a self-directed IRA plan provider and record-keeper, offers only self-directed IRAs, HSAs, Coverdell educational savings accounts, plus company sponsored SEP, SIMPLEs, 401k plans and recordkeeping for qualified plans and defined benefit plans. They can be reached at 303-546-7930 or toll free at 877-742-1270. Visit their website at NewDirectionIRA.com. New Direction does not offer investment advice nor do they sell any investments.