In order to reach your wealth-building goals, selecting the right kind of investment account is as important as choosing an appropriate asset allocation. By taking advantage of tax-favored accounts, millennial investors can supercharge their nest eggs.
An often overlooked but powerful wealth-building tool is the health savings account. Contributions to an HSA are tax-deductible, and investment gains and withdrawals are tax-free when used to pay for qualified medical expenses. That's a triple-tax advantage, which is amazing.
The result is the growth of an account that is truly tax-free. HSAs are relatively new, established by Congress in 2003, so millennials are the first generation uniquely positioned to take advantage of HSAs so early in life.
To be eligible for an HSA, you must be covered by a high-deductible health plan. An HDHP has lower premiums than a traditional health plan, but comes with a higher deductible. This means you pay less each month for health insurance, but potentially more out of pocket when you go to the doctor. Millennials can be excellent candidates for high-deductible plans because we tend to go to the doctor less and have lower medical expenses in general.
HSAs can be great for all ages, but particularly so for millennials who have decades for the investment to grow. Most people use the HSA like a savings account and spend it down each year on medical expenses.
Instead, to build wealth, you should view it as a long-term investment. You might keep a portion of your HSA in cash in case of an emergency, but otherwise, for maximum effect, it can pay off to invest the rest of your account for growth.
If eligible for an HSA, you can take full advantage by contributing the maximum allowed each year. In 2019 the contribution limit is $3,500 if you have individual health coverage, or up to $7,000 if you're covered by a family plan.
An HSA can also be an opportunity for "free money," as many employers offer matching contributions. These employer contributions do count toward the annual limit, but unlike a flexible spending account, or FSA, an HSA is not "use it or lose it," and the account stays with you even if you change jobs.