#60 - Why I Love HSAs - Part 2
In my last post, I wrote about some overarching principles of HSAs. I encourage you to read that post. Today, I want to walk you through an example to show you the possible dollar benefit.
The below chart compares making an HSA contribution, a pre-tax 401k contribution, and a Roth contribution. The first thing to note is that HSA contributions that are made by payroll deduction typically save you from income tax, Social Security tax, and Medicare tax. A pre-tax 401k contribution only saves you from income tax.
After adjusting for taxes, the HSA strategy would be worth over $17,000 more. That is just for a $6,000 contribution. Imagine doing this every year!
There are several assumptions that go into this example that may or may not be true. Each individual’s situation is different. The main assumptions are that the investment horizon is 30 years, the HSA, Pre-Tax 401k, and Roth grow at 8%, and the tax savings are invested and grow at 7.5%. This example also assumes that the individual pays 25% as an income tax today and in the future and that the growth on the tax savings account is tax-free. I assumed the same contribution amount ($6,000) to each account. There are contribution limits for each of these accounts that vary and may be more or less depending on an individual’s situation.
This example also assumes that the entire distribution from the HSA will be for qualified medical expenses and therefore will be tax-free. Many people question how much they will actually have in medical expenses and therefore wonder if this strategy is worth pursuing. I will admit there is a threshold where it makes sense to stop saving into HSAs but that threshold is much higher than many people think. That is what we will discuss next week.
Interesting Article(s) or Video(s)
A Wealth of Common Sense - The U.S. Real Estate Market in Charts
I think all the clickbait I need is for someone to put the word "charts" in the title. Gets me every time.
A Wealth of Common Sense - Some Money & Investing Stuff I've Changed My Mind About
Fascinating read! Our opinions and perspectives change. Ben Carlson walks through a few things he has changed his mind about. How have your opinions on money changed over time?
Thank you for reading!