Hi Money Minder,
I was wondering about HSAs as investment options. When do you think the cost of a high deductible plan outweighs the benefits of tax advantages and HSA investment growth, especially if it’s all for retirement savings and qualified healthcare expenses?
Forget about future HSA value and tax savings. To me, it seems logical to compare annual medical expenses to annual HSA growth. For instance, if I spend $1,500 on average each year, my HSA should grow by at least $1,500 annually to break even.
First off, should I consider the worst-case annual cost as the plan deductible or total spend? I think deductible makes sense, as it’s similar to a regular deductible plan without an HSA.
Secondly, how do you factor in tax advantages like current and post-retirement income tax deductions and tax-free capital gains? Does the break-even point change when taking these into account? Does a high enough HSA balance eventually make even average growth exceed the deductible?
Thanks to anyone who can help!
I tried working out the numbers assuming a 22% tax rate both now and in retirement:
1. A $4,150 contribution equals $913 tax savings today
2. Assuming 7% average growth over 25 years on a $4,150 contribution would equal $23.8K. Long-term capital gains tax rate of 15% equals $3,570.
3. Withdrawing $23.8K annually in retirement saves $5,236 in taxes.
So, theoretically, a $4,150 HSA contribution today with 7% growth over 25 years has a total value of $9,719 in tax savings alone.
I’m pretty sure I messed up somewhere in my calculations. This also affects the other numbers… And we’re not even talking about inflation.
Seeking Help
Farewell from Seeking Help.
Response from THE MONEY MINDER:
Hello There,
First off, I appreciate your detailed analysis and thoughtfulness in considering the ins and outs of using an HSA as an investment vehicle. When it comes to weighing the cost of being on a high deductible plan against the benefits of tax advantages and growth potential of invested HSA funds, there are several factors to consider.
In response to your first question about whether to consider the worst-case annual “cost” as the plan deductible or total spend, leaning towards the deductible makes sense since that is the threshold where your coverage kicks in. When calculating your average annual expenses, capping each year at the deductible seems like a reasonable approach.
Moving on to the second question regarding how to factor in the tax advantages like income tax deductions and tax-free capital gains, it can indeed be a game-changer in the break-even analysis. As you rightly pointed out, there may be a tipping point where the HSA balance becomes high enough that even modest average annual growth would surpass the deductible. Taking into account current and post-retirement tax rates, as well as the compounding effect over time, can significantly impact the value of using an HSA for retirement savings.
Your attempt at calculating the tax savings and growth potential over 25 years is commendable, showcasing the potential benefits of utilizing an HSA for long-term wealth accumulation. However, it might be beneficial to consult with a financial advisor or tax professional to ensure the accuracy of your calculations, especially factoring in inflation and other variables that could impact the final outcome.
In closing, exploring the intricacies of using an HSA as an investment vehicle requires careful consideration and planning. Your proactive approach to understanding the various elements involved is a solid foundation for making informed decisions about your financial future. Remember, seeking expert advice and staying informed will help you navigate the complexities of maximizing the potential benefits of an HSA for retirement savings. Keep up the good work on exploring your options and optimizing your financial strategy.
Farewell from THE MONEY MINDER.
