Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Inflation Eats Your HSA Triple Tax Advantage
Transcript
- Lucas: So Luna, we talk a lot about inflation eating away at different parts of our financial lives, but there's one account that's supposed to be this magic bullet against taxes, and yet most people are leaving it completely exposed to inflation. I'm talking about the Health Savings Account. Luna: The HSA. Everyone says it's the best retirement account you're not using, but you're saying inflation can still get to it? Lucas: Right. And it's not just that inflation can get to it, it's that the way most people use their HSA, they're practically inviting inflation in. The average HSA balance is somewhere around four thousand dollars, and a huge chunk of that is sitting in cash, earning next to nothing. Meanwhile, the latest CPI reading shows prices are still up, even if they've cooled a bit. The index was at 332.6 in June, down slightly from the month before, but the ten-year breakeven inflation rate just ticked up to 2.29 percent. That's the market's expectation for average inflation over the next decade. Luna: So the market is basically saying about two and a quarter percent inflation over ten years. That means if your HSA cash is earning zero, you're losing about two and a quarter percent of your purchasing power every year. Lucas: Exactly. And that's the quiet erosion. You don't see it on your statement. Your balance says the same number, but what that number can buy in medical care ten years from now is a lot less. Let's put some numbers on this. Say you're contributing the 2026 individual limit of three thousand eight hundred and fifty dollars a year, and you just let it sit in cash. After ten years, you've put in thirty-eight and a half thousand, but with two and a quarter percent inflation, the real value of that money is closer to thirty-one thousand in today's dollars. That's a seven thousand dollar hit to your future medical buying power. Luna: Ouch. And that's assuming you don't touch it. But a lot of people use their HSA for current medical expenses, which is fine, but then they never build up that long-term balance. Lucas: Right. And that's the thing. The HSA has this triple tax advantage: your contributions go in pre-tax, the growth is tax-deferred, and withdrawals for qualified medical expenses are completely tax-free. But if you're not investing for growth, you're only getting one out of those three benefits. The tax break on contributions is nice, but the real power comes from decades of tax-free growth. Luna: So what's the actual strategy then? I mean, you can't just throw everything into stocks because you might need that money for a doctor's visit next month. Lucas: Right. And that's where the 'cash buffer' idea comes in. Financial planners often suggest keeping enough in cash to cover your out-of-pocket maximum for the year, or maybe your deductible plus a cushion. For a lot of people, that's somewhere between two and five thousand dollars. That money is your near-term medical slush fund. It's not going to grow, but it's there when you need it. Then, anything above that buffer, you invest in a low-cost index fund, something that tracks the whole market. Luna: And that's where you can actually beat inflation, because historically the stock market has returned around seven percent after inflation over the long run. So even with a two and a quarter percent inflation drag, you're coming out way ahead. Lucas: Exactly. And there's a study from the Employee Benefit Research Institute that found HSA investors who put at least some of their money into equities had balances that were significantly higher over time than those who stayed in cash. I mean, it's almost obvious, but people still don't do it. I think the default in most HSA plans is a money market or a savings account, and you have to actively go in and select an investment option. Most people never do. Luna: And I've been guilty of that myself. I just left my HSA in cash for years because I didn't want the hassle. But you're right, it's a missed opportunity. Lucas: So let's talk about the mechanics. If you're twenty-five and you max out your HSA every year until you're sixty-five, and you invest it in a simple index fund, you could have well over a million dollars in today's dollars, and all of it tax-free when you use it for medical costs in retirement. That's a powerful retirement tool. And even if you don't spend it all on medical expenses, after sixty-five you can use it for anything, you just pay income tax on non-medical withdrawals. So it becomes like an extra IRA. Luna: But wait, there's a catch, right? I mean, with most good things, there's a catch. What's the downside? Lucas: The downside is that you have to be disciplined about not withdrawing for current expenses if you want that long-term growth. And there's also the penalty if you withdraw for non-medical reasons before sixty-five. It's a twenty percent penalty plus income tax. So it's not like a regular brokerage account. But if you're using it for its intended purpose, it's hard to beat. And there's also the fact that not everyone has access to an HSA. You need a high-deductible health plan, and those aren't right for everyone. But if you're young and healthy, it can be a smart move. Luna: And that's actually a good point. A lot of people hear 'HSA' and think, 'Oh, that's for people with lots of medical expenses,' but really, if you're healthy and can afford the high deductible, it's a fantastic savings vehicle. Lucas: And you can even pay for current medical expenses out of pocket and save the receipts. Then later, you can reimburse yourself from the HSA. There's no time limit on when you have to reimburse yourself, as long as the expense was incurred after you opened the HSA. So you could pay a hundred dollar copay today, keep the receipt, and let that hundred dollars grow for twenty years, then reimburse yourself tax-free. It's a way to get the best of both worlds. Luna: That's a pro move. I didn't know that. So you're basically using your HSA as a long-term investment account and just tracking your medical expenses separately. Lucas: And it's completely legal. The IRS just requires you to keep the receipts. So you need to be organized, but it's a great strategy for maximizing the tax advantage. Luna: Okay, so let's say I want to do this. I have my cash buffer, and I want to invest the rest. How do I actually do it? I log into my HSA provider, and it's not exactly user-friendly. What should I look for? Lucas: First, check if your HSA provider offers investment options. Some do, some don't. If they don't, you can often do a trustee to trustee transfer to an HSA provider that does, like Fidelity or Lively. Then, look for a low-cost index fund, something like an S&P 500 index fund or a total stock market fund. The expense ratio should be under point two percent. And once you pick it, set up automatic contributions so you're investing every paycheck. It's the same as any other investment account, you just have to take that first step. Luna: And if you're listening and you've been meaning to do this, it might be a good time to check your HSA statement. See what you're earning on your cash. I bet it's less than two and a quarter percent. Lucas: And that two and a quarter percent is the market's expectation. Actual inflation could be higher or lower, but you're almost certainly losing ground if you're earning zero. So that's the practical takeaway: don't let your HSA just sit there. Treat it like the investment account it can be. Luna: And speaking of not letting things just sit there, a lot of people have been asking how they can support the show, and honestly, a couple of dollars a month is genuinely what keeps these episodes free and ad-free. If you've gotten something out of our conversations, you can head to buy me a coffee dot com slash fexingo. It makes a real difference. Lucas: Yeah, it really does. We keep the show ad-free, and it's only because of listeners like you who chip in. And we're not asking for a lot, just whatever feels right. It helps us keep doing the research and bringing you these specific numbers. Luna: And it's super easy, just buy me a coffee dot com slash fexingo. But back to HSAs, one more thing I want to mention: if you're over fifty-five, you get a catch-up contribution. That's an extra thousand dollars a year. So if you're behind on retirement savings, that's a nice boost, especially with the tax benefits. Lucas: Absolutely. And that catch-up amount is on top of the regular limit, so it's a powerful way to accelerate your savings in those final working years. And then when you hit sixty-five, you can use those funds for Medicare premiums, long-term care, dental, vision, anything. It's a really flexible account. Luna: So, to sum up, the HSA is a great tool, but only if you use it right. Keep a cash buffer, invest the rest, and let it grow tax-free for decades. And track those receipts so you can reimburse yourself later if you need to. Lucas: Exactly. And the key is to start now. Even if you can only contribute a small amount, the earlier you start, the more time your money has to compound. And with inflation at two and a quarter percent, every year you wait costs you a little more purchasing power. So open that HSA or check your current one, and see if you can move some of that cash into an index fund. Your future self will thank you. Luna: Well, that's a solid plan. And for anyone who wants more details, we'll put some links in the show notes to our sources and a simple guide to investing your HSA. Lucas: Definitely. And thanks for joining us today. We'll be back tomorrow with another way inflation is quietly eating your money, and what you can do about it.