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!

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.