A health savings plan is a fantastic tool that can lessen the burden of health care costs now and in the future. Unused funds in the account roll over year after year, accumulating growth that can significantly supplement your retirement income. A self-directed health savings account gives you the additional benefit of investing those funds into alternative assets that can boost the earnings in the account. This article explains the benefits of HSAs, and how self-directed plans work to your advantage.
What Is an HSA?
Health savings accounts are tax-advantaged plans that work like an IRA, except 
you can use the funds at any age to pay for qualified medical expenses.
When you retire, funds in your HSA can significantly augment your retirement income in two ways:
1. You can use your HSA funds to pay for qualified medical expenses instead of using your retirement income. This can be a game changer if you face an unexpected, major illness. In the face of rising health care costs at a time when you’re living on a fixed income, HSAs are worth their weight in gold.
2. Additionally, once you reach the age of 65, you can take penalty-free distributions of your HSA funds to pay for anything. Now, you will have to pay tax on funds not used for medical costs—but with the penalty gone, and if you’re account has a healthy balance, imagine the possibilities. You can spend that money on vacations, splurge on gifts, or even to help buy yourself a new home. And, you still have the funds you’ve saved in your retirement plan to continue providing you consistent income in your golden years.
Who Is Eligible for an HSA?
Not everyone can contribute to an HSA. To qualify, you must be enrolled in a high-deductible healthcare plan (HDHP). You can’t have other insurance or Medicare. And, while the HDHP covers you for catastrophic medical issues, HSA funds can be used for most other qualified medical costs. When used together, the HDHP and HSA can be incredibly beneficial in covering most of your health care needs.
HDHP deductibles are high, but the premiums are low. Their renewal rates are quite a bit cheaper than PPOs and HMOs, which can mean big savings over time.
It’s important to note that once you become a Medicare participant and/or are not eligible for an HDHP, you won’t be allowed to make contributions to your HSA. However, the funds you’ve accumulated in the account over the years are till available—tax and penalty-free—to pay for qualified medical costs.
Why Use an HSA?
- HSAs give you the freedom to choose your own doctors and health care providers.
- HSA funds can be used for qualified medical expenses and for costs that may not be covered by PPOs or HMOs such as dental, vision, psychiatry and other care. See IRS Publication 502 for details on qualified expenses.
- The funds roll over from year-to-year, accumulating growth, and remain available in your HSA until you use them.
- Depending on your situation, health care costs may not be considered a tax-deductible event. However, contributions to an HSA are tax-deferred and funds spent on qualified health care costs are deductible.
Why Should You Use a Self-Directed HSA?
- Self-directed health savings accounts allow the funds to be invested into alternative assets, which have the potential to earn income at a faster pace than traditional investments present.
- Alternative investments offer an incredibly large and diverse pool of potential income-building assets such as real estate, private mortgages, forex, precious metals, private equity—and so much more.
- Funds inside your HSA earn interest. Again, over time, these earnings can be significant thanks to compound interest and any successful investments you purchased with those funds.
- You can partner your self-directed HSA funds with your self-directed retirement plan funds or personal cash to invest. This enables you to acquire more lucrative assets, if you choose.
- When you use a self-directed health savings plan and a self-directed retirement plan, you control not only the funds in both accounts, but the investing decisions, as well. This means you gain control of quite a bit in a world where controlling anything is sometimes merely an illusion.
Want a Bonus?
You can open more than one health savings account (HSA), which also means you can have more than one self-directed health savings plan. Contribution limits for 2023 for all accounts cannot exceed $3,850 for individual plans or $7,750 for family plans. Having more than one account allows you to strategically manage your funds. In the event you need cash to pay for a medical expense, it helps to have one account that’s totally liquid. The other one (or two or three!) can be tied up in assets that are hopefully also producing income.
If you’d like to learn more about self-directed health savings plans, please contact Advanta IRA.
This article was first published on January 13, 2021, and has been updated with current information for 2023.
