When I graduated optometry school and was finally making real honest to goodness money, I didn’t really know what to do with it. I knew I should save some for a rainy day, so I did that while paying off my student loans. I wasn’t even doing that efficiently until I learned the Avalanche method. I decided to start reading up on investing and money management in general, and eventually got my 401k funded, maxed out a Roth IRA and even started a 529 plan for my son. Let me just pat myself on the back real fast.
But the account that I think has the most bang for the buck, especially for young people just out of school, is the Health Savings Account, or HSA. I have written before about how great the HSA is, but over time I’ve come to realize that it’s not just a great account for most people, but it is an amazing, and dare I say “must have” account for young people especially. That’s because it can serve as an emergency fund for short term healthcare expenses and also act as a retirement account.
A Versatile Account
HSA’s aren’t usually advertised as retirement accounts. They are shown to be a benefit that comes with signing up for a High Deductible Health Plan (HDHP). These plans usually have high deductibles and low monthly premiums, so you end up paying for your care out of pocket, but you pay less every month for the plan. The HSA is there to set aside some money ($6,660 is the limit for families for 2015) pre-tax that will help you pay for those out of pocket costs. This can serve as a kind of personal healthcare emergency fund, which you can use to augment your regular emergency fund sitting in your savings account.
While this is a great benefit in itself, it starts getting more interesting for the following 2 reasons:
- Many HSA providers give you the option to choose investments. These range from ultra conservative money market funds to aggressive stock funds.
- Any type of non healthcare related expense that you use an HSA distribution for before the age of 65 will be taxed and you will have to pay a penalty. But after 65, any type distribution can be taken penalty free.
Having investment choices and penalty free distributions after 65 makes this account almost exactly like a Traditional IRA. But why is this a good thing for young people? It’s because, for the most part, young people are healthy and don’t spend much on healthcare. If you’re someone who is in relatively good health and doesn’t spend much on healthcare throughout the year, then the HSA is a fantastic choice. You can leave the money in the account to grow from a young age, and when you get to be 65, you can start withdrawing the money for any type of retirement expense. Along the way, you can always tap the money for any large healthcare expenses that come up.
For people like this, my advice is as follows: Open an HSA as soon as you are able. Contribute the maximum amount every year since this will help you save money on taxes. If your provider has investment options, simply choose an aggressive fund with low fees and let it ride, changing to less aggressive funds as 65 gets closer. Any small healthcare expenses can be paid out of your own pocket (with a credit card that earns rewards of course). You may have to tap the account for any large expenses, but ithat’s okay since that what the account is for anyway!
This is a fairly simple strategy that can provide great diversification among your accounts. If you are a young person with few healthcare costs, you will be doing your future self a great favor by signing up for an HSA and using it the right way.