Financial Pilates

Mark Eckman

NOTHING COMPARES to the human body when it comes to the combination of strength, flexibility and control. Build a strong core, and the possibilities are limitless. Through the discipline of Pilates, you can strengthen your core, while developing flexibility and control. It’s a wonderful tool, but one that’s underutilized.

The same can be said for health savings accounts, or HSAs, which can be funded if you have a high-deductible health plan. With an HSA, you can build strength, flexibility and control, helping you to achieve financial independence with an unrivaled triple-tax advantage—tax-deductible contributions, tax-deferred growth and tax-free withdrawals when the money’s used for qualified health care expenses.

In its most common form, an HSA is simply a checking account with a debit card, and that’s a shame. While that checking account offers flexibility, it doesn’t build strength or offer you control. But banks love to use your money as a cheap source of funds, while your dollars sit there waiting to cover future health care costs. Other HSAs allow you to purchase a limited number of mutual funds, but those funds often have high annual expenses and some even charge upfront sales commissions.

If you find your HSA has these issues, find a new HSA provider. If your HSA is part of your employee benefits, explain to the benefits department that there are much better options.

What do you want? The latest generation of HSA providers offer an unlimited menu of investments, plus some additional features specific to HSAs. For instance, the HSA might allow you to set a dollar amount for the cash held in your account, with everything over that amount directed into longer-term investments.

A voice might be telling you that you simply don’t have enough to fund both an HSA and your 401(k). My advice: Think of your 401(k) and HSA as a single long-term investment.

Remember, you can use any amounts left in your HSA for retirement, just like it was your 401(k). Withdrawals for qualified medical expenses are always tax-free. Meanwhile, withdrawals after age 65 for other uses will be taxed as ordinary income—the same as money coming out of a traditional 401(k).

Look to fund your HSA to the max and then direct additional savings to your 401(k). The HSA then becomes a combination emergency health care and retirement fund. You’re still investing and growing your retirement assets, while also gaining flexibility in case of unforeseen health care expenses. This might allow you to avoid taking a loan or even a hardship withdrawal from your 401(k) to cover health care costs. Hardship withdrawals are taxable and, if they happen before you reach age 59½, you have a 10% tax penalty, too.

One warning: Check both the timing and formula your 401(k) uses to compute the employer match. Make sure you contribute enough to the plan each paycheck to earn your employer’s maximum matching contribution. That’s a financial bonanza you don’t want to miss.

Mark Eckman is a data-oriented CPA with a focus on employee benefit plans. His previous article was Giving Voice. As Mark approaches retirement, he’s realizing that saving and investing were just the start—and maybe the easy part. His priorities: family, food and fun. Follow Mark on Twitter @Mark236CPA.

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