FINANCIAL FRESHMAN #041
TL;DR → Your future employer may offer you access to an HSA, or Health Savings Account. It’s commonly said that these accounts come with triple tax advantages—because contributions are made with before-tax dollars, investments grow tax-free, and withdrawals for qualified medical expenses are not subject to taxes.
HSA Introduction
On Financial Freshman, we’ve talked in detail about benefits that your future employer may offer you. We’ve written about the typical 401(k), and highlighted why it may be worth looking past base salary when you’re offered your first job out of college. To this point, there’s an awesome benefit that we haven’t yet covered—the Health Savings Account, or HSA.
According to the Consumer Financial Protection Bureau, HSA prevalence grew 500% over the decade ending in 2023. My goal with this post is to be a one-stop-shop for all things HSA. What are they? How do they work? Why should you consider one? We’ll start from the top.
What’s an HSA?
Knowing the acronym itself gives you a few clues, as obviously these are savings accounts that will help you offset the costs of your healthcare. In short, HSAs are tax-advantaged accounts that you can use to pay for qualified medical expenses.
“Tax-advantaged” is an understatement in this case, as HSAs are largely regarded as one of the best tools for reducing your tax burden both now and in the future. If you ever read that HSAs are “triple tax advantaged,” here’s a graphic that outlines exactly what that means.
It sounds too good to be true, but this is how HSAs operate in practice! In the event that you enroll in one:
- You will make contributions with income before taxes are taken out, effectively reducing your total taxable income.
- You will enjoy tax-free investment gains, in the same manner that you would inside of a Roth IRA.
- You will not have to pay taxes when you take money out of your HSA to pay for qualified medial expenses.
Healthcare aside, HSAs are one of the single best tools available to reduce your tax burden while building wealth.
Why Care Now?
This all may create the question—if I am early in my career, why should I care about a dedicated savings vehicle for healthcare expenses?
We’ve learned about the power of compound growth in the market, so why not leverage that to give you some healthcare peace of mind?
You’re young, so your medical expenses are, statistically speaking, fairly low. So you can do more saving than spending, and give that money decades to grow in the market, if you so choose.
According to a 2004 study by the NIH, you can expect that roughly 31% of your lifetime healthcare expenses will be incurred between the ages of 40 and 64, with another 48% coming after the age of 65. This graph essentially presents lifetime healthcare spend as a “balance,” showing you how much you have left at any given age.
It’s worth noting that this is pretty old data, so the total cost of a lifetime of healthcare has most certainly gone up. The ratio by age being unchanged, however, is a reasonable assumption to make.
If you knew you had six-figures worth of healthcare expense coming after age 65, wouldn’t you start saving now?
Final Thoughts
In summary, an HSA isn’t just a health savings account. It’s a powerful financial tool that can help you save on taxes, grow your wealth, and prepare for future healthcare costs. By contributing early in your career, you can take advantage of tax benefits and invest for long-term growth, giving you peace of mind for the future.
Next week, we’ll explore how an HSA works in real life, with practical examples of how to use it for medical expenses and as an investment tool. Stay tuned!
