Utilizing an HSA (Health Savings Account) is a smart strategy to add to your overall nest egg. HSA's can be a source of tax-free income in retirement if you pay cash for medical expenses now but wait to request reimbursement until after you retire.
If that made your head spin while also totally exciting you, read on. We will discuss Health Savings Accounts to get you familiar with these FI-friendly accounts, and how to best utilize this type of account to help you generate some tax-free income once you've reached FI.
A Primer On HSAs
In order to qualify for an HSA, you'll need to be enrolled in a high deductible health insurance plan. The government defines this as a health insurance plan with a deductible of at least $1,400 for an individual, or $2,800 for a family.
As of 2020, the HSA contribution limit is now $3,550 for a single person and $7,100 for families. Additionally, adults over 55 can add up to $1,000 more per year.
After you sign up, you will receive a debit card or checks linked to your HSA balance, and you can use the money in your HSA on eligible medical expenses. This includes deductibles, copays, and coinsurance, plus other qualified medical expenses not covered by your plan. Be aware that insurance premiums cannot be paid for with your HSA funds, but there are other ways you can utilize these funds to your advantage!
Unlike a Flexible Spending Account (FSA), your HSA balance rolls over each year. You never have to worry about losing funds even if you didn’t have any major medical expenses. After you’ve hit age 65 and have Medicare benefits, you will no longer be able to contribute to your HSA. However, you will be able to utilize your accrued funds to cover medical expenses. Any other use of the funds will result in a penalty–so plan accordingly!
Your HSA, FI Style
So, now that you’re sold on how an HSA can be totally useful in general, let's level up to optimize your Health Savings Account. Typically, you'd pay for an out of pocket medical expense directly out of the HSA with your linked debit card or accompanying checks. Another way to go about it is to pay for this expense with non-HSA funds (say from your personal checking account) and then reimburse yourself from your HSA.
The trick is that there is no time frame to request this reimbursement. So you can pay cash for a doctor's visit today and wait until you are in retirement to request the reimbursement. Doing this will give you an extra source of tax-free income in retirement.
This has the added bonus of allowing the HSA funds to stay invested and growing over the next few years–or decades.
In order to use this income hack effectively, you’ll need to track your expenses for an extended period of time. A well stocked HSA can serve as an emergency fund for non-medical expenses if you have proper documentation. It seems to be too good to be true, but it is!
Lively: A Modern Health Savings Account
If you're concerned about HSA fees (yes, most HSA accounts come with fees), you might want to consider opening up an HSA with Lively. Lively is a modern HSA platform that allows you to open and manage an HSA with no fees.
You can contribute to your Lively HSA via employer contributions or by contributing directly from your bank account. Your Lively HSA funds will sit in an interest-bearing account that's insured by the FDIC. If you want to invest your HSA funds, you can do so using Lively's partnership with TD Ameritrade.
There's no minimum balance you need to adhere to when you start your HSA with Lively. And there's no minimum balance you need to meet to start investing your HSA funds. In addition, Lively gives you up to three free debit cards to use to withdraw your HSA funds. Bonus: Your Lively HSA is managed entirely online, directly by you, and features paperless statements as well.
Related: The Triple Tax Benefits Of The HSA
The Importance Of Record Keeping
To do this, you’ll want to fully fund your HSA every year. And hang on to medical receipts showing you paid cash along the way. Later on, if you have a $500 expense that isn’t medically related, but you have at least $500 worth of non-reimbursed medical expenses you can prove with receipts, you can submit those receipts to get a $500 reimbursement check from your HSA to pay for that unrelated, and non-medical event.
As some have described, you can see it as an additional IRA, especially if you have a reliable amount of medical care you need each year, it can serve as another tool in your arsenal to invest now, for tax-free income later.
Proof Of Your Medical Expenses
You will need to keep your receipts for several years to best anticipate expenses. Additionally, you will need to keep receipts that are itemized, or detailed to prove the following:
- Date of service
- Patient or person getting service
- Service rendered
- Cost of service
- Proof of payment
Whenever you go to the dentist or doctor, you’ll want to make sure you get detailed receipts. If that’s not possible, you should be able to cross reference and store any supplemental documentation you receive from your insurance company, usually in the form of an EOB, or “Explanation of Benefits” later. If you aren’t mailed this, you might be able to access it from your insurance provider portal online.
Tracking Methods For HSA Receipts
Receipt Storage And Organization
While it may be tempting to throw all of your receipts in a folder or box, you may find that certain receipts degrade over time and become illegible. Additionally, should anything happen to your home due to fire or flood, you’ll be out of luck. Take time to safeguard your records.
By spending the time, now, to build a comprehensive and organized place to find what you need, later, you will be set for providing documentation for reimbursement.
A few quick pointers. You can easily scan receipts in with a scanner and set up a file system on your computer. Taking it one step further, and utilizing cloud software helps free up space on your computer desktop. It can also ensure that even if your hard drive fails, you’ll still have your files and they can be accessed anywhere. Another option is to take photos of all receipts with your phone and upload these to a cloud-based tool like Evernote or Dropbox.
Utilize Apps For Easy Documentation
Apps like GeniusScan make it so easy. GeniusScan has recognition software to frame up your receipt for clarity, then a fast export feature that allows you to quickly rename your files by date and type to keep a consistent naming convention for easy retrieval later. With a few thumb taps, you can utilize an easy sync feature to send them to your preferred cloud-based storage.
Whether using your phone’s camera, your home scanner, or an app that does the heavy lifting for you to cut down on organization time, you’ll want to ensure you have backups.
Tracking With Spreadsheets
No matter how you’re logging the visual copies of your receipts, you’ll still want to take the extra step of ensuring you have a comprehensive picture of your medical expenses and track them accordingly. Taking the time as you go along to categorize, organize, and document your expenses now makes hacking later easier.
Whatever spreadsheet you use–be sure to back it up as well. ChooseFI community members have suggested that you can keep your spreadsheet on Google Drive which updates within the cloud. Or, you could drop a copy of an Excel spreadsheet on your computer. Just make sure you know which version you’re referencing and updating.
A little planning and organizing now can go a long way in the future. Happy hacking!
- Podcast Episode: The Triple Tax Savings Of Health Savings Account
- How An HSA Fits With Your FIRE Plans