The Unicorn of Retirement Plans

Any personal finance site worth a dime has a post on the amazing HSA retirement triple threat, and since we’re now worth at least a couple dimes, it’s time to add our version to the mix.

Retirement triple threat?

When we’re deciding how to allocate funds for retirement, we’re usually deciding between putting money in one of two buckets:

Bucket 1.  Tax Deductible Contributions:  These plans include IRA’s and 401k’s.  Here you receive a tax deduction today along with tax deferred growth, but pay tax on every penny at consumption (retirement or death).

Bucket 2.  Tax Free Distributions – These plans include Roth’s and CVLI.  Here you get tax free growth and tax free distributions, but you don’t get any relief on this year’s tax liability. 

Both buckets get tax free growth, but you have to choose between a tax deduction today versus tax free distributions tomorrow?  The age old Traditional v Roth debate. 

With an HSA, when used properly, you get a tax deduction today, tax free growth, AND tax free distributions at retirement.  The triple threat! This is so powerful, we pay all our medical expenses from our checking account in order to keep as much in the HSA as possible.

What is an HSA?

Let’s start with the basics.  HSA stands for Health Savings Account.  It’s an account that’s offered in conjunction with high deductible health plans. 

The idea is fairly simple, most consumers only use their health insurance for annual check-ups and perhaps a sick appointment or two (or twelve if you have a child).  The point is, for most of us the actual cost of the services used is way less than what we typically pay for the insurance itself.  If this describes you then (at least statistically) it would be cheaper to keep your premiums and self-insure.  No one would ever do that because that would of course be stupid… one unfortunate incident and you’re completely bankrupt. 

Enter the happy medium.  With a high deductible health plan, you pay a fraction of the price of traditional health insurance but also agree to pay all of your medical bills up to your high deductible amount (mine is $5,000).  You also take the savings from paying less for the policy and put them in the health savings account (limited to contribution caps of $3,450 single and $6,850 married in 2018).  If you can manage to avoid surgery for a few years, you can see how your HSA account can build fairly quickly.  

What’s more, you can actually invest your HSA funds and the growth is shielded from tax liability!  My HSA is administered by the appropriately named HSA Bank and they allow me to invest my account balance through a separate Ameritrade account.  And if that weren’t enough, as long as our HSA funds are used for medical expenses, the government allows the distributions to occur tax free!

What’s the Catch?

There really isn’t one so long as you use the funds for medical expenses.  If you pull money at age 65 or later from the HSA for non-medical expenses, you will incur tax liability in much the same way you would with a traditional 401k plan. 

At first glance, this may seem like a huge catch and this distribution plan may seem highly situation dependent given the medical expense requirement for tax free distributions, but it’s actually not for two reasons:

  1. There is no deadline to claim HSA expenses, meaning I can pay out of pocket for a procedure for my infant son today and wait 30 years to claim the expense. So long as you save receipts you’ll have almost unfettered access to your HSA account; and
  2. Quite honestly, unless we die young, I fully expect to incur enough medical bills or long term care needs to more than exhaust our HSA account.

There you have it.  The unicorn of retirement plans.  Now the piece of the puzzle I haven’t yet solved, how to get my wife to remember to not to use the HSA card at Walgreens!

-Woodstock


4 comments

  1. I agree the HSA is one of the best things available and if dollars were tight I would suggest maxing that out first before any other vehicle because of the triple tax advantage you speak of.

    I have been collecting receipts now as I cash flow all medical expenses, and it can be a pain. And on top of that I really think it may not be necessary because healthcare expenses later on will likely eat it up anyway (if estimates are correct that a couple 65 will require 250k of healthcare), so at one point I may stop bothering with the small trivial stuff.

    The only issue I have is that the HSA can vary between companies so you may be stuck with not much to invest across. Mine charges a $3/mo fee for unlimited trades and fortunately offers Vanguard Index funds (although no REITs) which essentially matches my other vehicles.

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