A self-directed health savings account (HSA) follows the same IRS rules that a regular HSA does. Self-directed plans have the same annual contribution limits and eligibility requirements. They provide a way to build tax-free funds you can spend on qualified medical expenses throughout your lifetime. So, how is a self-directed HSA different than a regular HSA?
The edge a self-directed HSA has over the conventional account is the ability to invest in alternative assets.
You must have a high-deductible healthcare plan (HDHP) to contribute to any HSA. And since health insurance renewal begins in November-December for next year, now is the time to decide whether you want to open an HSA. If you do, make sure your health care plan qualifies.
Self-Directed HSA Investing
People self-direct retirement plans and other savings accounts because they want control. There is a certain security in making your own investment choices. There is great freedom when you don’t depend on Wall Street to earn income in tax-advantaged accounts.
Self-directed health savings accounts give you control over your own investing decisions just like a self-directed IRA. And, yes, that means that you choose the assets for the account, not a broker or account custodian.
If you self-direct your HSA and invest in things like real estate or private equity—things you know and understand—just imagine the potential growth that you could achieve to cover qualified health care costs for you and your family. And this asset class is vast—from crypts to cryptocurrency, there are thousands of alternative investments available.
Alternative investments include:
- Single-family homes
- Multifamily and commercial property
- Multifamily syndications
- Fix-and-flips
- Rental property
- Farmland, crops, and timberland
- Unimproved land
- Overseas property
- Tax liens and deeds
- Private mortgages
- Mobile homes and parks
- LLCs, LLPs, and trusts
- Oil, gas, and/or mineral rights
- Private equity and private stock
- Crowdfunding opportunities
- Businesses, franchises, and startups
- Futures and foreign exchange (forex) trading
- Hedge funds
- Cryptocurrency
- Precious metals
- …and many other investment options
Self-directed HSAs allow you to capitalize on the account’s tax-free earning potential by investing in assets you know and understand. Plus, you get the benefits that all HSAs offer.
Benefits of HSAs
Both self-directed HSAs and regular HSAs offer the following features:
- Contributions to HSAs are made with pre-tax dollars and are tax deductible.
- Unused funds roll over into next year’s funds.
- The interest earned in the account is not taxable.
- Accounts are offered by some employers, banks, insurance companies, etc.
- If you change employers, your HSA follows you.
- Anyone can contribute: your employer, family member.
- Employer contributions do not count towards your income.
A Self-Directed Health Savings Account Is a Powerful Retirement Planning Tool
These plans can significantly supplement retirement income provided you’ve amassed adequate funds in the HSA when you retire. And, when you can invest your account into diverse assets besides stocks, bonds, and mutual funds—you have the chance to increase that earning potential.
The extra funds you build in your HSA can keep you from dipping into your retirement plan funds.
If you experience a major, unexpected health issue you can use funds from that account instead of depleting your retirement funds. You can use HSA funds to pay for copayments, deductibles, coinsurance, along with other qualified health care expenses. Note: If you take the funds out for any other reason, you’ll pay a stiff penalty and face a tax liability.
However, when you turn 65 years old, you’re entitled to take penalty-free withdrawals to spend on anything. Understandably, those withdrawals are taxable if the funds aren’t spent on qualified health care costs. But if the account holds substantial funds when you retire—some things outside the spending restrictions may very well be worth paying tax on!
If you are interested in learning more about self-directed health savings accounts, contact Advanta IRA today. We are always happy to explain how these plans can be incorporated into your investing and retirement planning strategy.
For more information on self-directed HSAs, check out our webinar:
Don’t Miss Open Enrollment for Self-Directed HSAs
Tuesday, October 3, 2023
12-1 pm ET (9-10 am PT)
Additional resources on self-directed accounts:
Why Consider a Self-Directed Health Savings Account?
What Are Alternative Investments? Here’s a List of 120+ for You & Your SDIRA
How to Choose a Self-Directed IRA Services Provider
This article was initially published in November 2021 and has been updated with current information.
