BLOOMINGTON, Ind. – Many experts have praised health savings accounts – commonly known as HSAs – for their triple tax relief. Money is deposited pre-tax, can grow tax-free, and is not taxed when spent, provided the expenses qualify. During the pandemic, they became an important way to save for unforeseen health costs.
But for those coming out of college and starting a new career, health savings accounts can also be the first key to building wealth, according to a new article from Greg Geisler, clinical professor of accounting at Indiana University Kelley School of Business.
“Early career employees often wonder how to gain financial freedom as quickly as possible. The options for a portion of their unallocated monthly salary include investing and paying off debt, ”Geisler said. “Financial press articles often recommend getting maximum employer 401 (k) correspondence because it’s basically free money. But after that the recommendations vary and there is little analysis of the recommendation that maximizes wealth. No one is talking about health savings accounts.
By writing in the current number of the Journal of Financial Services Professionals, Geisler ranked the most tax-efficient financial measures young people should take early in their careers. Its first two steps are to put the most in a health savings account and put enough of it in a 401 (k) to get the best employer.
“Ideally, these first two moves should be done together,” he said. “Even if your HSA has no employer contribution, if you are in the 22% tax bracket, where there are a lot of recent college graduates, that health savings account will actually make you richer.” than an employer equal to 50% on your 401 (k). “
“Retirement accounts have two tax advantages, but an HSA is the only account that has three.”
You can only save money in an HSA if you have high-deductible health insurance coverage, which is becoming the most common coverage offered by employers.
Over the past year, the list of eligible healthcare expenses that can be paid or reimbursed from an HSA has grown to now include over-the-counter medications. On March 26, the IRS also declared that face masks, hand sanitizers and disinfectant wipes purchased to prevent the spread of COVID-19 were eligible.
While some consumers can immediately access their health savings accounts, Geisler said it might be more beneficial to keep receipts when they “need money tax-free.” Young people generally have lower health care costs and can invest their funds in stocks within the HSA and watch the size of that account grow tax-free.
“It’s not like a flexible spending account, which is ‘use it or lose it’. With a health savings account, you have it for the rest of your life and you can pay yourself off immediately or you can wait, ”he said. “There is a lot more you can pay for in your lifetime than you might think.”
Geisler shares a real, real-life example of someone starting their career with students taking their senior personal finance course. Assuming a salary of $ 60,000, this person in their illustration, who goes through the two steps outlined above only has to spend $ 370 less per month to get the maximum 401 (k) match from the employer (assumed be 50% of the first 5% of the salary) and put the maximum in their HSA.
“You never realize you missed out on the $ 370 you saved because you are doing the 401 (k) up to the employer’s maximum and doing the health savings account both through deductions from your pay, ”he said. “If you don’t see it, you don’t miss it. If you don’t spend $ 370 per month you can invest $ 8,100 in stocks in a year in your HSA and 401 (k) because of all the tax savings and start on the road to financial freedom. In addition, the amount of withholding taxes may be less if you have an employer who puts money in your health savings account.
After these first two steps, Geisler recommends that beginners pay off all high-interest debt and then contribute to a Roth IRA every year, as the contributions can be used for emergency franchise spending needs. tax. “There are other things you can do, but I’m focusing on these four steps because these are things that someone starting a career can potentially do,” he said.
Geisler’s article, “On the Road to Financial Freedom at the Beginning of a Career,” appears in the Journal of Financial Service Professionals. Journalists can request a copy by contacting George Vlahakis at [email protected]