You’re probably familiar with well-known tax-advantaged accounts like 401(k)s and IRAs.
But there’s one account type that’s surprisingly overlooked – the Health Savings Account (HSA).
HSAs are usually misunderstood and, as a result, often underutilized.
But if you know how to navigate them effectively, HSAs can pack a powerful punch when it comes to your tax savings and retirement planning.
The Basics
First things first: how do HSAs actually work?
In order to open and contribute to an HSA, you’ll need to be enrolled in a high-deductible health plan (HDHP).
The rules determining what counts as an HDHP change annually, but the criteria for 2024 are:
- Minimum annual deductible: $1,600 (Self-only coverage) or $3,200 (Family coverage)
- Maximum out-of-pocket expenses: $8,050 (Self) or $16,100 (Family)
Pharma employees generally have access to flexible insurance benefits – so you likely have the option of enrolling in an HDHP and accessing an HSA.
Like any other tax-advantaged account, though, HSAs come with contribution limits. For 2024, the limits are $4,150 for self-only coverage and $8,300 for family coverage.
And remember, that’s a total contribution limit – if your employer contributes on your behalf, that counts toward the total too.
Once you have money inside an HSA, you can usually invest it in assets like mutual funds and ETFs, just like a 401(k).
Some administrators limit the investment options available inside an HSA, though, so always double-check your plan details.
Okay, that’s enough about the rules – what are the benefits of contributing to an HSA?
The Triple Tax Advantage
As the name suggests, HSAs are primarily designed to help you save money for medical expenses.
And if you use them for this purpose, HSAs offer a rare triple tax advantage:
- Contributions are made with pre-tax money.
- Investment gains in the account grow tax-free.
- And you owe no taxes on withdrawals used to reimburse yourself for qualified medical expenses.
Qualified medical expenses include most things you’d expect, like out-of-pocket costs for surgeries, medicine, and hospital visits.
But it also includes some things you might not expect, like over-the-counter medications and healthcare-related travel.
It’s hard to overstate how rare this is. The HSA might well be the only triple-advantaged account in the entire US tax system.
And the best part? You don’t have to reimburse yourself in the same year you paid the expenses.
For example, suppose you spend $1,000 on an HSA-eligible out-of-pocket expense in 2024.
Instead of withdrawing the money today to reimburse yourself, you can wait, letting the money in your HSA grow tax-free.
In 10 years or so, $1,000 invested in your HSA might have grown to $2,000 – but you still need to withdraw just $1,000 to reimburse yourself.
Since HSAs have no reimbursement time limit, you can use this strategy to let your money grow tax-free for years before you actually withdraw the cash.
Just remember, you can only reimburse yourself for medical expenses incurred after you opened the HSA.
And make sure you hang on to those receipts!
HSAs as an Extra IRA
If you’re not someone with big health expenses, you might be skeptical that opening up an HSA is worth it.
After all, what if you save too much in your HSA, and don’t have enough medical expenses to use all the money?
Here’s the good news: the government thought about this and decided they didn’t want to punish people for saving too much money.
Therefore, after the age of 65, you can withdraw money from your HSA penalty-free for any reason at all – you’ll just have to pay income taxes on it like you would a Traditional IRA or 401(k).
This little loophole effectively turns the HSA into an extra Traditional IRA (albeit one that unlocks at 65, rather than 59 ½).
Plus, the HSA contribution limit is entirely separate from IRA or 401(k) contribution limits.
As a result, it can provide an extra boost to your tax-advantaged savings if you’re already maxing out your other accounts (especially if you don’t have access to the high limits of a 401(k)).
Is an HSA Right for You?
As a pharma employee, odds are that you have access to an HSA.
But despite all the benefits we discussed, this isn’t the right move for everyone.
An HSA requires signing up for an HDHP. If you’re worried about big out-of-pocket expenses, an HDHP might not be a good fit.
Plus, not all HSA plan administrators offer access to the type of investments that make this account viable as an extra IRA.
Finally, we shouldn’t discount the burden of paperwork associated with reimbursing yourself for qualified health expenses.
If you want to discuss an HSA and how it might fit into your financial plan, I’m always available for a quick phone call.
Plans can vary from company to company, so a one-on-one call can help you navigate the details.
In the right hands, an HSA can be a powerful investment and savings tool – even if they’re less popular than the usual options.
Interested in more investment tips for Pharma employees?
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