How One Millionaire Uses a Health Savings Account HSA to Build Wealth

• Brennan Schlagbaum and his spouse paid off six-figures in debt and now have a web value of almost $2 million. 
• The couple invests in index funds throughout numerous funding accounts, from IRAs to a brokerage account.
• Of all of his various kinds of accounts, his favourite is his well being financial savings account (HSA).

Brennan Schlagbaum has a easy strategy to investing — he places most of his cash in three index funds — however he does have a number of accounts to juggle.

The 31 yr previous, who paid off greater than $300,000 value of debt together with his spouse Erin earlier than constructing a web value of almost $2 million, has his investments unfold throughout seven various kinds of accounts. 

He and Erin have three kinds of retirement accounts: two particular person retirement accounts (IRAs), a solo 401(ok), which is a person 401(ok) plan particularly for enterprise house owners like Brennan who haven’t got staff, and Erin’s worker inventory possession plan (ESOP) from her earlier employer.

Moreover, they’ve a well being financial savings account (HSA), a taxable brokerage account, a 529 plan (a sort of funding plan that gives tax-free earnings and withdrawals for certified academic bills), and a high-yield financial savings account, which is the place they put aside cash for property taxes that they owe on the finish of every yr.

“Since we do not have a mortgage, we owe property taxes at yr finish,” defined Schlagbaum. He and Erin, who personal their main residence in Texas outright, owe $12,000 in property taxes annually, so that they ship $1,000 a month to a high-yield financial savings account to cowl that expense. Excessive-yield financial savings accounts, which earn a number of occasions greater than a conventional financial savings account, sometimes return between 3.40% APY and 4.25% APY. 

Of all of his accounts, “my HSA is my favourite by far,” mentioned Schlagbaum, who give up his CPA job in 2021 to deal with his monetary schooling enterprise Budgetdog full-time. 

Insider verified the Schlagbaums web value by account screenshots and a replica of their private steadiness sheet.

Maxing out his HSA, not touching the cash, and letting it develop tax-free 

An HSA is a financial savings automobile that allows you to contribute pre-tax {dollars} for well being prices, however it can be used as an funding instrument and to complement your retirement accounts.

Much like an IRA, you can also make annual contributions to an HSA (the contribution limits for 2023 are $3,850 for people and $7,750 for households) and also you get vital tax perks. Within the case of an HSA, you really get a triple tax benefit: You possibly can contribute pre-tax {dollars} (which reduces your taxable earnings), your contributions and earnings develop tax-free over time, and you’ll withdraw your cash tax-free to cowl certified medical bills. (Additionally like an IRA, you possibly can make investments your HSA steadiness in mutual funds, shares, or ETFs, relying on what the plan presents.)

When you withdraw cash for one thing apart from a professional medical expense (which embrace issues like physician’s workplace visits and co-pays, lab charges, and vaccines), you may pay atypical earnings taxes on the withdrawal and owe a 20% early withdrawal penalty. (That is for those who’re below 65; after 65, you should use your HSA cash to cowl any expense with out incurring a penalty.)

The Schlagbaums occur to have a number of medical bills at the moment, as their daughter was identified with Dravet syndrome in 2022. 

“Her medical payments have totaled fairly a bit,” mentioned Schlagbaum. “In 2022, they have been $200,000. After all, insurance coverage does cowl a number of that.” However for no matter out-of-pocket bills they’re on the hook for, “we now have the flexibility to tug that cash tax-free at any level sooner or later. It provides us a number of flexibility down the street.”

HSA accounts, not like FSAs (versatile spending accounts, that are one other sort of account that may assist with well being care prices) haven’t got a “use it or lose it” coverage. Any unused funds in your HSA robotically roll over to the following yr.

Whereas the Schlagbaums can use their HSA funds for his or her medical prices proper now, they decide to not. They’re in a monetary place the place they will afford to pay out-of-pocket with the money movement from Brennan’s firm, which means their HSA cash can proceed to develop.

“I will let that cash sit there and make investments for years to return,” mentioned Schlagbaum. “It is a actually good technique, to not point out, at 65, the HSA turns into a conventional IRA. So we now have flexibility from that angle too; I might deal with this as a hybrid retirement account. Or, I might use all these financial savings finally for any medical prices that we now have at that cut-off date.”

He contributes the utmost quantity annually, he mentioned: “The restrict this yr is $7,750 per yr, so each two weeks that equates to about $298.07.” 

The truth that there is a contribution restrict is “an indication that it is a actually good account from a tax-savings perspective, he added. “There is a purpose they put a cap on it. So, if we put all of our $7,750 in there, we need to ensure all of that’s invested and never touched.”

Notice that, to make use of an HSA, you must be enrolled in a excessive deductible well being plan (HDHP), a sort of medical insurance plan that sometimes comes with decrease month-to-month premiums however increased out-of-pocket prices. 

Any such plan shouldn’t be the only option for everybody. It is sometimes well-suited for people who find themselves very wholesome and do not plan on looking for medical care incessantly.

“When you’re a wholesome particular person otherwise you’re single and you do not have a number of medical visits, the HSA is usually a nice route,” mentioned Schlagbaum. “The other facet of the spectrum is me and our household: the person who has the infants and the well being considerations. That may get costly.”

They will afford to pay their deductible upfront, although, and are snug with their plan’s out-of-pocket max, which is probably the most you may spend on lined well being care in a yr.

When you’re excited by going the HSA route, look intently on the deductible and out-of-pocket max when evaluating plans.

“You might have to pay attention to the potential value that might come for those who do need to go to the physician,” mentioned Schlagbaum. “Lots of people go down this route they usually get an HSA as a result of they hear somebody on-line speak about it, however unexpectedly it turns into a nightmare as a result of they’re out-of-pocket all this cash.”

Relying in your medical and monetary state of affairs, going with an HDHP “might find yourself being dearer,” he warned. “It’s a must to ensure you can afford the out-of-pocket max.”

This story was initially printed in July 2023.