BLOOMINGTON, Ind. – Many experts have praised health savings accounts – commonly known as HSAs – for providing a triple tax break. Money is deposited pretax, can grow tax-free and is not taxed when it is spent, as long you as the expenses are eligible. During the pandemic, they have become an important way to save for unexpected healthcare costs.
But for those graduating from college and beginning a new career, health savings accounts also can be the first key to accumulating wealth, according to a new article by Greg Geisler, clinical professor of accounting in the Indiana University Kelley School of Business.
“Employees beginning their career often wonder how to gain financial freedom as soon as possible. Options for part of their monthly paycheck not allotted to spending include investing and paying down debts,” Geisler said. “Articles in the financial press often recommend getting the maximum employer 401(k) match since it is essentially free money. But after that, the recommendations vary and there is little analysis of which recommendation maximizes wealth. No one is talking about health savings accounts.”
Writing in the current issue of the Journal of Financial Service Professionals, Geisler ranked the most tax-efficient financial moves that young people should make when beginning a career. His first two steps are to put the maximum into a health savings account and put enough into a 401(k) to obtain the greatest employer match.
“Ideally, these first two moves should be made together,” he said. “Even if your HSA doesn’t have an employer contribution, if you’re in the 22 percent tax bracket, where many new college graduates find themselves in, this health savings account will actually make you wealthier than a 50 percent employer match on your 401(k).”
“Retirement accounts have two tax advantages, but an HSA is the only account that has three.”
You can only set aside money in an HSA if you have high-deductible health insurance plan coverage, which is becoming the most commonly provided coverage offered by employers.
In the last year, the list of eligible health related expenses that can be paid or reimbursed for out of an HSA has expanded, now including over-the-counter medications. On March 26, the IRS also said that face masks, hand sanitizers and sanitizing wipes purchased to prevent the spread of COVID-19 were eligible.