Joyce’s article about the estate tax initiative here in Oregon prompted me to think about ways to earn and invest money responsibly, while still avoiding increasingly overburdening taxes. There does happen to be one place where the IRS allows you to deduct money that you contribute here on your income tax return, and doesn’t then tax you upon withdrawal of those funds. This in effect gives you the anomaly of truly tax-free money: The one...the only...the Health Savings Account (HSA).
While investing in municipal bonds allows you to earn interest that is income-tax free, you usually must purchase them with after-tax dollars. If you purchase them in an IRA with pre-tax dollars, you will be taxed when you withdraw them. One Facebook friend declared that gold is also truly tax-free, if you extract it yourself instead of purchase it. Touché, but it’s a risky proposition—I’d call panning or mining for precious metals speculation, not investment planning.
With a Health Savings Account, you are pretty much assured that your “investment” will “pan out”. If you purchase a corresponding health insurance policy—one that meets IRS guidelines such as $1,000 minimum deductible, and $5,000 maximum out-of-pocket risk annually—the HSA becomes a very attractive option. I contend that it is even more attractive than an IRA or 401(k), aside from those funds that are matched or contributed by an employer.
The HSA can even be used as an IRA if/when you reach age 65 and don’t want to reserve it for health expenses only. However, if you choose this option, your withdrawals will be taxed as ordinary income—similar to the IRA—according to current tax code.
You can open a Health Savings Account at most any bank. Checks, online banking, and debit cards are common, as are $2-$5 monthly fees. The best place (lowest fees) I’ve found for opening accounts is Blackhawk Bank in Beloit, WI. You can do nearly everything online or by phone. After you build a $5,000 balance in your HSA at Blackhawk Bank, they allow you to invest in Vanguard mutual funds—who I feel is the best in the mutual fund business.
My strategy has been to purchase my health insurance plan from Regence with a $7,000 family deductible and $10,000 out-of-pocket maximum. My entire family costs only $335/month! Next, I max out my contributions to my HSA each year, at $6,250 for a family. That is a total family healthcare outlay of less than $900/month, and 60% of it I get to keep—tax-free—in my own account. Then, once my HSA balance gets above the $10,000 annual out-of-pocket maximum, I will invest the difference in a Vanguard mutual fund to capture future growth, either for tax-free healthcare costs (Medicare supplement plan premiums count!), or for retirement income at age 65 and beyond. The best thing to come out of a Bush presidency? The HSA; without a doubt.