Eli5: What is a health savings account and why is it so great?

Question

Anytime I try to do my benefits the description isn’t helpful in explaining why it’s such a good investment move, aside from stating the obvious that it saves money incase you need it. Do I have to invest it? Or do you just let it sit? I’m confused

In: Economics

Answer 1

Note that an HSA is only available if you have a qualifying HDHP (mine meets the deductible limits, but because I have copays before my deductible limit I don’t qualify). So compare your medical plans with your medical situation, as you may be better off with a different plan that isn’t HSA-eligible (check if your employer also has an FSA).

• Traditional retirement (1.5x tax advantaged): You pay FICA tax but not income tax on contributions, money grows tax-free, you pay income tax on qualified withdrawals.

• Roth retirement (1.5x tax advantaged): You pay FICA & income tax on contributions, money grows tax-free, you pay no tax on qualified withdrawals.

• Standard brokerage account (0x tax advantaged): You pay FICA & income tax on contributions, money does not grow tax-free (dividends are taxed, and if you ever rebalance that can be taxed as well), you pay capital gains tax on realized gains.

**HSA** (3x tax advantaged if done thru payroll): You don’t pay FICA nor income tax on contributions, money grows tax-free, you pay no tax on qualified withdrawals (medical expenses).

As such, it’s even better than a 401k/IRA. It is recommended that you don’t use your HSA while you are employed unless you absolutely have to, as it’s better to keep your medical receipts and then reimburse yourself when you are retired as your portfolio most likely outpaced inflation.

To add:

• FSA (2x tax advantaged): you don’t pay FICA nor income tax on contributions, money is just held in the account, you pay no tax on qualified withdrawals. However, unissued funds are lost (given to employer) annually, though the IRS does allow a few hundred dollars to be rolled over, but your employer/provider must allow for this as well and they may also have an expiry clause against repeat rollovers. The main benefit over an HSA is that your full annual election amount is immediately available (employer/provider fronts the difference), meaning if you elected to contribute $2k/ye and on the first week you had a surprise $2k medical emergency, then the FSA can cover that and you just use the rest of the year’s payroll deductions to pay back the difference.