Optimizing your benefits package can be a satisfying and important part of building your wealth. One tactic to consider is using a Health Savings Account (HSA), a powerful tool for healthcare and long-term financial planning. 

HSAs let you manage healthcare expenses, maximize tax advantages, and even grow an investment portfolio, all in one account.

In this article, we’ll explain why, as a tech professional, you should consider whether an HSA is right for your needs. We’ll also explore the unique benefits that make them a smart choice for both short-term savings and long-term wealth-building and offer strategies to help you leverage this account to its full potential.

If you need help optimizing your employer benefits, including the HSA, then reach out to us using THIS link.

What is a Health Savings Account (HSA)

If you are considering an early retirement, you should investigate a Health Savings Account (HSA), as they are packed with tax benefits. Commonly confused with a Flexible Spending Account (FSA) and discounted for its small contribution limits, this account could be the difference maker in creating financial independence for you and your family.

An HSA is typically associated with a high-deductible healthcare plan. While your monthly payments or premiums are typically lower with a high-deductible healthcare plan, your out-of-pocket expenses will likely be higher. Unlike an FSA, you don’t need to spend your contributions in the same year. However, like an FSA, an HSA allows you to use your contributions for various medical expenses.

HSAs come with a lot of flexibility. Not only on what you can spend the money on but also on how you use it before and during your retirement. HSA can be used:

• As a regular retirement account at age 65
• It  can also be used to pay for:
  • Medicare premiums
  • Long-term care premiums
  • COBRA premiums if you are in between jobs.

However, an HSA is not for everyone. Suppose you have a chronic illness, including expensive medication costs, a newborn child, or you are experiencing other medical issues. In that case, you may opt for a healthcare plan with lower out-of-pocket expenses.

As a tech professional, you likely have access to an HSA. To make the most out of your HSA benefit, you need to understand its impact, how to avoid the most costly mistake, how to maximize flexibility, and a variety of small nuances.

Interested in learning more about how you can leverage an HSA account?  Schedule a call with our San Francisco CFP® team. 

Tax advantages and power of HSA for Tech Professionals

At first glance, the numbers behind an HSA might not seem all that exciting. But when you consider the tax advantages and how these benefits stack up over time—especially if you are considering an early retirement—you may find it a game-changer.

Both you and your employer benefit from a lower-cost insurance plan. These savings could add up, saving you thousands of dollars each year on insurance costs, making an HSA an even smarter choice for immediate and long-term financial planning.

In 2024, individuals can contribute up to $4,150 annually, while families can contribute up to $8,300. Often, employers sweeten the deal by matching your HSA contributions. It’s important to note that employer contributions count toward your annual maximum, but this is essentially free money, just like a 401(k) match—it’s definitely worth taking advantage of.

Did you know that HSAs also have a triple tax benefit?   

• Your contributions are deductible from your income
• Your contributions grow tax-free
• You can make tax-free withdrawals to pay for medical expenses
• Deductions are exempt from FICA, which is another 7.6% benefit exclusive to HSAs.

Consider how this tax benefit could make a powerful difference in your financial future. 

Imagine you’re 35 with a family and in a high tax bracket. To keep it simple, let’s say your combined federal, state, and FICA taxes average out to 37.6%. Each year, you contribute a maximum of $8,300 to your HSA, investing it at a modest 6% return until retirement at age 65.

Every year for 30 years, your HSA contributions save you about $3,120 in taxes, up to $93,624. But the real magic happens with the tax-free growth: by retirement, your HSA could grow to roughly $656,000, for a total tax benefit of over $750,000.

If you were to save that same amount in a brokerage account, the capital gains at distribution could cost you around $100,000—not to mention the missed tax deductions and the impact of annual taxes on your returns. The HSA, by comparison, offers a uniquely efficient way to grow your savings while keeping more in your pocket.

HSA Misunderstandings

Many people contribute to their HSA but miss its full potential by treating it as a simple savings account instead of a powerful investment tool. Instead of withdrawing funds for medical expenses, consider paying out-of-pocket and letting your HSA balance grow tax-free. 

Mistake #1: Not Investing Your HSA

Unlike a 401(k), an HSA doesn’t automatically invest your contributions in a target date fund aimed at your retirement age. 

So, to start investing in your HSA, you’ll typically need to meet a minimum cash balance, often around $1,000. Once you’ve hit that threshold, follow these steps to ensure your HSA funds work for you. It’s important to note that the specifics can vary depending on your provider:

1. Some HSA providers require a separate brokerage account, which may require creating a new login and profile.

2. Move the balance above the required cash amount to your investment account. Note that this transfer is usually not automatic, so you must initiate it.

3. Choose investments based on when you anticipate needing the funds. While a target date fund is common in retirement accounts, it may not suit your specific HSA needs.

4. Set up recurring transfers and automatic investments for future contributions to keep your HSA growing without frequent manual adjustments.

Ready to start planning for your early retirement?  Connect with our team today.

Mistake #2: Not Keeping Proper Receipts/Records of Your Withdrawals

To make the most of your HSA, the key is to avoid spending from it now and let your balance grow. While using HSA funds for current medical expenses may be tempting, saving those receipts and covering out-of-pocket costs helps unlock the HSA’s full potential for long-term, tax-free growth.

An HSA doesn’t just offer a triple tax benefit—it’s also an incredibly flexible tool for retirement planning. If you reach retirement age without needing the funds for medical expenses, your HSA can act much like a traditional IRA. Contributions reduce your taxable income, the money grows tax-free, and withdrawals after age 65 are treated as ordinary income if used for non-medical purposes.

But here’s the real perk: if you’re planning for early retirement, save every medical expense 

receipt along the way. An HSA lets you reimburse yourself for qualified expenses from any past year. So, if you had a major medical bill five years ago that you paid out-of-pocket, you can reimburse yourself tax-free in the future. With a well-documented backlog of expenses, your HSA can become a powerful tax-free source of funds for early retirement.

The main challenge here is keeping thorough records. Get in the habit of pulling PDFs of your medical bills each year and storing them in a secure, organized location like Google Drive or another digital archive. These records can pave the way for smarter, tax-free withdrawals.

Additional HSA Tips 

If you want to leverage every benefit while sidestepping common pitfalls fully, these six tips will guide you through key strategies and important considerations:

• Rolling Over Your HSA – Unlike a 401(k), you can roll over your HSA anytime if you are unsatisfied with your employer’s investment options. However, your payroll contributions will continue into your employer’s HSA, so you must roll them over periodically. The best time to transfer your HSA is typically when you switch employers.

• Communicating with Your Tax Preparer – Even though HSA contributions are deducted from payroll, it’s essential to inform your tax preparer. This ensures all contributions are properly documented and any distributions are correctly reported on your return.

• Naming the Right Beneficiary – Designate your spouse as your HSA beneficiary whenever possible. A non-spouse beneficiary would have to withdraw the entire balance upon inheriting it, which can trigger unnecessary taxes. This makes the HSA ideal for retirement spending since it doesn’t require minimum distributions.

• Avoiding Overcontributions – Exceeding your HSA contribution limit can lead to stiff penalties. If you and your spouse have HSAs, stay within the family contribution limits and remember to factor in any employer match.

• Understanding Non-Qualified Withdrawals – Withdrawals for non-medical expenses before age 65 come with a steep 20% penalty—double that of an early IRA withdrawal. Fortunately, the list of qualified expenses is broad, especially if you’ve saved past receipts for potential tax-free reimbursements.

• Coordinating with an FSA – You can still have an FSA, but it must be a limited-purpose FSA, covering only dental and vision expenses. Check with your employer to see if this option is available.

Why Partner with RHS Financial for Your HSA Needs?

As a tech professional, your financial needs are unique, requiring strategies that maximize flexibility and growth potential. 

At RHS Financial, we understand the fast-paced demands of your industry and the importance of making every dollar work for you—from your HSA to your investment portfolio. Our team tailors wealth management solutions that align with your current goals and adapt to the evolving financial landscape. 

With our expertise, you’ll get the guidance to make strategic decisions about your HSA, retirement, tax optimization, and more. This allows you to focus on what you do best while we help secure your financial future.

Connect with us today to learn more about our wealth management services for tech professionals.