Why I Don't Pay Taxes On Investments (Using an HSA Account)

Here’s a step by step explanation of how to not pay taxes on investments using an HSA account

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In order to effectively AVOID paying taxes, we’re going to use something called an HSA which stands for a Health, Savings, Account. What it is – is its a savings account, pure and simple. Think of your checking and savings but it’s a separate account that gives you multiple tax advantages. Anyone can have an HSA who’s enrolle in a high deductible health plan which is often abbreviated as – HDHP.

A deductible is what YOU have to pay FIRST before your insurance kicks in. For example, if you have $2,000 deductible healthcare plan, that means if you get into an accident and break your finger off, that means YOU have to cover up to $2,000 of it FIRST, before your insurance will pay for the rest of it. That’s what a deductible is. A premium on the other hand, is what you pay for your health insurance, usually on a monthly basis.

Money that goes into your HSA is yours FOREVER, and you use that money to pay for medical expenses without paying taxes on it. If you change jobs, or get fired from a job, you still get to keep your HSA BUT you can only contribute to it IF you’re enrolled in a qualifying HDHP.

if you lose your job halfway through the year, you can still contribute up to a certain percent of however long you worked for. So for example, if you worked for 6 months of the year, you can contribute up to half the limit which is $3,550 for individual plans, and 7100 for family plans in 2020. Also, you do NOT have to contribute a portion of your pay check each time, you can literally contribute NOTHING the entire year and then do one giant lump sum at the end of the year and max it out like I did with my Roth IRA when I set mine up when I made the tutorial with the M1 Finance app.

The HSA account is a way for the government to provide help for people with higher out of pocket costs by motivating people to hopefully save and invest their money so that they can pay for said costs. If you can take advantage of an HSA, it would be a very smart move for your money but in order to understand just WHY this is considered a super IRA, you have to understand the benefits of a few other accounts, specifically, your Traditional IRA, and your Roth IRA. The HSA account is like a hybrid of both of those accounts.

Most people however dismiss this account because of ONE simple rule. The health savings account can ONLY be used to pay for medical expenses. if you don’t use end up using your HSA for any medical expenses, you can actually use that money for ANY expenses after you turn 65 without a penalty. You’ll still have to pay income tax on money that you withdraw that are not qualified medical expenses, just like you would in a traditional IRA, but you won’t have any more penalties or fees. So worst case scenario, this HSA account literally becomes like your traditional IRA.

Leave this money alone, and let it sit invested in a low cost index fund that’s tracking the market IF your employer offers it. So instead of paying your medical bills and then reimbursing yourself with your HSA, pay for your medical bills with your normal tax money that you earn, and just leave your HSA account alone and let compound interest do the magic of multiplying your money.

BUT MAKE SURE, to keep track and hold on to ALL receipts of your medical expenses so you know how much you can withdraw from your HSA. As you start to pay those bills, you can increase the amount you can withdraw in early retirement. You’re basically concerting your HSA into an early retirement Roth IRA over time.

After age 65, any money that’s left that wasn’t used to pay for medical expenses you basically treat as a traditional IRA with any additional withdrawals to be taxed as ordinary income.fter age 65, any money that’s left that wasn’t used to pay for medical expenses you basically treat as a traditional IRA with any additional withdrawals to be taxed as ordinary income.

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