Step 14: Health Savings Account

Health savings account may not immediately jump out at you as an effective tool in the path to financial independence. I know it didn’t for me at first. If you are currently on a high deductible health care plan you probably have access to a health savings account. The problem is that your HR representative is probably underselling the usefulness of that account.

In my experience, most people on the high deductible health care plan were on the younger end of the spectrum and more likely in a healthy state. Probably why they were willing to risk the high deductible plan in the first place. I know that is why I had that plan in my early 20s. The irony is that the power of this account is often lost on us that young because we understandably aren’t maxing our retirement savings yet.

Health Savings Account

Wait… I want to start at the beginning.
Link to the previous step – Step 13: Save 15% for Retirement

Let’s begin by clearing up some confusion that I admittedly had originally regarding the health savings account (HSA) and their cousins the flexible spending account (FSA) that many people mistakenly interchange.  Both accounts are very similar in that they allow the owner to contribute tax-deferred money to pay for future qualified health expenses.  

There are some key differences between the accounts that are very important.  First, the HSA is only available to someone covered by a High Deductible Health Plan whereas the FSA is available to anyone covered by an employer health plan.  Second, HSA contributions do not have a use timeline and can grow in the account over a long time frame whereas the FSA funds expire at the end of the year and must be used or lost.

They are both useful and have their place in your financial plan but the HSA has clear advantages that can’t be matched by the FSA.  If you have access to the HSA and want to plan for future health expenses with tax-advantaged money I can see why it is highly recommended.

Disclaimer: I don’t have one

I’m not going to lie here…  I  don’t have access to an HSA right now as part of my health insurance plan nor do I feel like I have any level of authority to speak to you on whether or not you should get one.  From what I’ve read, it sounds like a fantastic option for people to save money tax-free and spend it tax-free on health expenses (something we’ll all eventually incur).  I just don’t currently have an HSA or see myself having access to one any time soon.

Well.. not any more

One of the first companies I worked for in my career paid 100% of their employee’s health care expenses (family plans cost extra) which is a huge perk.  When looking through the available plans I saw that they offered a high deductible health care plan with a health savings account (HSA).  They also acknowledged that this plan cost them less to offer than the traditional plans and to make the benefit equal for all employees they would take the cost savings and deposit that amount into the HSA for you.

As an early 20-something professional in good health and no spouse or children, this seemed  like a prime opportunity. Health care enough to cover anything catastrophic while racking up a bunch of “free money” in an HSA for later.  It worked and I soon had a couple thousand dollars saved. Saved for future health expenses I was sure I’d eventually have to account for.

Even routine medical care is pricey

Once I got married my wife was quickly able to deplete that fund with various wellness checkups and exams.  We joked for a long time that I was apparently accumulating that money for her to spend. Honestly, it never bothered me because her expenses are my expenses.  What else was that money for if not to spend on qualified medical expenses.  Perhaps HSA financial independence experts would disagree with how quickly I spent the funds. I’ll sleep well at night with that decision given it wasn’t a ton of money.

Speaking of HSA experts far more qualified to discuss the pros and cons, here are some other experts.  I could read them and attempt to distill that newfound knowledge into a cursory discussion here. We both know that would be doing them a disservice and a waste of both of our time.

Additional resources

Please visit the fine folks at the following blogs for more information on an Health savings accounts. Come back here to continue your journey to financial independence.  We are so close to putting this engine on full speed auto-pilot.

The Mad Fientist – one of my favorite sources of tax optimization in FIRE

HSA – The Ultimate Retirement Account

ChooseFI – a great all-around podcast on FIRE and resource aggregator

HOW AN HSA FITS WITH YOUR FIRE PLANS

Money under 30 – another great resource on HSA accounts

Want To Retire Early? You Can Use Your HSA To Help You Do So

TL;DR

HSAs might be the ultimate early retirement account because you can contribute pre-tax, grow the balance tax-free, and withdraw the funds tax-free for qualified medical expenses. If you have access to this type of account, evaluate the merits of contributing for your circumstance.