If you want to avoid taxes, a health savings account is one of the best accounts to use because of its triple tax advantage.
HSAs were introduced in 2003 when Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act. They were designed to help people with high-deductible health plans, or HDHPs, save for health-related expenses, but financially savvy individuals are using them to enhance their retirement nest eggs.
Brennan Schlagbaum, who paid off more than $300,000 worth of debt with his wife, Erin, before building a net worth of nearly $2 million, has his investments spread across seven types of accounts. "My HSA is my favorite by far," he told Business Insider.
BI verified the Schlagbaums' net worth by looking at account screenshots and a copy of their personal balance sheet.
How an HSA works and who can open one
An HSA is a savings vehicle that lets you contribute pretax dollars for health costs, but it can also be used as an investment tool.
As with an IRA, you can invest your HSA balance in mutual funds, stocks, or ETFs, depending on what the plan offers. Note that some HSA administrators require you to hold a minimum cash balance in the HSA outside what you invest.
Also, like an IRA, an HSA has a contribution limit. In 2024, individuals can contribute up to $4,150, while the limit for families is $8,300. If you're 55 or older, you can contribute an extra $1,000.
What sets the HSA apart from other investment vehicles is its three-pronged tax benefit: You can contribute pretax dollars (reducing your taxable income), your contributions and earnings grow tax-free over time, and you can withdraw your money tax-free to cover qualified medical expenses (including things like copays, lab fees, and vaccines).
If you withdraw money for something other than a qualified medical expense, you'll pay ordinary income taxes on the withdrawal and owe a 20% early-withdrawal penalty — that's if you're under 65. After 65, you can use your HSA money to cover any expense without incurring a penalty, but the funds are subject to income tax.
HSAs don't have a "use it or lose it" policy like flexible spending accounts, another savings vehicle that can help with healthcare costs. Any unused funds in your HSA automatically roll over to the next year.
To use an HSA, you have to be enrolled in an HDHP, a type of health-insurance plan that typically has lower monthly premiums but higher out-of-pocket costs.
Additionally, to qualify, you cannot be enrolled in Medicare, and you cannot be claimed as a dependent on another person's tax return.
An HDHP isn't the best choice for everyone. It's typically well suited for people who are very healthy, don't plan on seeking medical care frequently, and have the liquidity to cover potentially high out-of-pocket expenses. You'll want to compare plans and look closely at the deductible and out-of-pocket max before signing up for an HDHP.
The millennial millionaire strategy: Maxing out the plan, not touching the money, and letting it grow tax-free
Since an HSA allows you to invest your savings, if you can cover your medical expenses out of pocket and let your HSA funds grow tax-free over time, you could have a sizable account by the time you hit retirement.
Say you opened an account at 30 and deposited $100 each month into an S&P 500 index fund. Assuming an 8% return, by the time you hit 70, you'd have over $310,000 in that account alone. If you deposited $345 a month (roughly the max you can contribute as an individual in 2024), you'd end up with over $1 million by 70.
That's what the Schlagbaums are doing: maxing out their account. While they technically can use their HSA funds for medical costs, they opt not to touch that money so it can grow.
"I'm going to let that money sit there and invest for years to come," Schlagbaum said.
The contribution limit is "a sign that it's a really good account from a tax-savings perspective," he added. "We want to max it out and leave that money in there because it's a huge benefit the government is giving us."
Lauren and Steven Keys, who built their seven-figure net worth through savvy saving and investing habits, also max out their HSA.
Like the Schlagbaums, the Keyses could use their HSA funds for their medical costs, but they prefer to pay out of pocket with their cash flow so their HSA funds can remain untouched.
"We save all the receipts from all our health-related expenses, which you're allowed to save for an indefinite period of time," Steven Keys said. That way, they can reimburse themselves from their HSA at any time. "We haven't needed the money, so we haven't done it, but that's available."
The Schlagbaums do the same thing. They save every health-related receipt in an email folder and track their health-related expenses in an Excel spreadsheet.
"The Excel template says the date, the time, what it was for, and the amount, and then I can cross-reference to my email folder," Schlagbaum said. "So in the future, I could pull, let's call it, $30,000, theoretically. I'm not going to; I'm going to let it sit there and invest. That's the whole point."
