Key Points

  • Solid financial plannings means taking care of any tax advantage you can.
  • However, it’s important to understand that most tax breaks have deadlines, meaning: you snooze, you lose.
  • The HSA could potentially be the best plan you never heard about.
  • This program allows you to potentially invest with pre-tax savings, and spend without taxes as well.

Tax Man Saves the Day

There are two certainties in life; death and taxes. But there’s one more; tax deadlines. Here’s how it can impact you. The U.S. government has some great tax benefits for individuals looking to lower their tax burden, but in these benefits have dates where if you fail to make the appropriate moves, you can miss out on some big time savings. You’re probably familiar with the basics; max out your 401k each year, if possible. Max out your IRA each year, if possible. But there’s another hidden gem that we also should carefully consider. It’s the HSA, known as the Health Savings Plan. And it just may very well be one of the best plans that the government offers these days.

The Mechanics

Here’s how it works. For 2018, you can contribute to an HSA plan by up to $3450 for individual or $6,900 for a family by April 15, 2019. These funds are pre-tax (i.e., tax deductible), and the account assets can grow tax free, and then be spent tax free after retirement on anything. Sounds almost too good to be true, right?

Case Study

Here’s a quick example of the year zero tax savings. Before my HSA account I owed $5891 in taxes, but after fully funding an HSA account with $6900, my tax burden dropped to $3971. That’s a savings of $1920 right off the bat, meaning money in my pocket. Of course, I had to tie up $6900. But let’s say I planned on saving this amount for retirement. Well, in that case, I would have saved this amount anyway, so the $1920 can be considered to be full on savings. Nothing in life is free. But this sure sounds like it, right?

Time Only Helps

But now, let’s consider what this $6900 can be worth at retirement if invested in a passively managed index fund tied to the S&P 500 Index. We’ve studied this type of strategy in the past, so we’ll use a rough guidance from our previous analysis. Based upon this study, we could potentially grow this initial investment to over $100k after 45 years. And the best part is that it can be spent at that time on basically anything.

Note: this is not tax advice, as your exact situation can vary significantly from mine. It’s just a solid real world example of how solid planning can save you some real money today and down the road, that is if you make the right moves at the right time. And of course, if you miss the boat, there’s always next year, right?