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Tax Me Never, Yeah Baby!

By Mike Lynch CFP®

Financial Planner

Want to accumulate a bucket of money that will never, ever, ever be taxed? Here’s a strategy: sign up for a health savings account. 

The health savings account is the holy grail of taxes.  It avoids all federal income and payroll taxes when you contribute—even better up front tax-deal than an employer sponsored 401k or personally maintained IRA.  Like all tax favored accounts, there are no federal taxes on the year-to-year income and gains in the account as it marinates.  Here’s the kicker: Like a Roth IRA or 401K, if the money is distributed for appropriate expenditures in a compliant way, there are no federal taxes when it’s spent.

It’s triple-tax free! No federal taxes, not even FICA and Medicare, so long as it’s payroll deducted.  Never. (States have the option to tax contributions and gains. At present, three states tax contributions and two states tax earnings.)

There are plenty of catches, but none need to be too onerous.  First, a person or family must have a qualifying health care plan.  These plans have high deductibles—a minimum of $1,300 for an individual and $2,600 for a family in 2017. That’s why the tax-free savings is blessed. Instead of sending the money to an insurance company tax-free to later have it potentially pay out for you tax free, you are paying yourself and retaining the money and the risk tax free. These are available in the individual market and increasingly at major corporations.  One in four employers that offers health insurance includes an HSA eligible option.i

Next the money needs to be spent on a qualifying heath care item.  The full list is available is IRS Publication 502.  It’s a fun read and you’ll find that along with the predictable health expenses it includes such items as acupuncture, service dogs, and weight loss programs. This is the same list used by the older and more familiar flexible spending account (FSA) that provide our frame of reference for the HSA. If you ever need the money for health care spending, it’ll be there for that traditional use. The big difference is that the FSA is a use it or lose it account—money unspent in each year, is lost forever.  The utility of the HSA is that the money can be invested and accumulate year over year. 

This is where the mental shift and opportunity arises to build a substantial tax free next egg for retirement spending—even if it’s not directly for health care.  I often counsel my clients to put in as much as possible and never take a withdrawal from the HSA for a routine health care expense, such as a co-pay, that can be covered from regular income or taxable savings.  (Again, if it’s ever needed, it’s accumulated for this purpose.) This leaves the money to compound tax-free for retirement. At that time, it can use this to cover the more than $260,000 per couple that Fidelity estimates they will need for spending.**  Consider it a Roth IRA for health care expense.

But it gets even better.  Under current rules, a distribution is tax free if it’s used to cover a qualified health care expense. There is no requirement, however, that this expense and distribution occur in the same calendar year. The power play is to save heath care receipts for all the non-reimbursed health spending and then, for whatever reason one wants, one can withdraw that much tax free at any time.  Really.  It’s true.  It can turn into a tax-free cruise fund.

Let’s put some numbers on it.  This example does not represent actual or future performance of any specific investment or product and should not be used to predict or project investment performance.  A 45-year old who put in the max family contribution of $6,750 for 20 years and earned rate of return of 6 percent, compounded annually —a hypothetical number that is certainly not guaranteed—would potentially have $248,302 after 20 years when it’s time for Medicare.  She would have contributed $135,000. If she spent $2,600 annually—the minimum deductible--out of pocket and saved the receipts, she’d have $52,000 that could be dropped out at any time for any reason.  If, however, she would have spent the $2,600 from the account each year she’d only have $151,556 at retirement.  She’d also have to use all of it for future health care expenses.  Not terrible, for sure, but depending on the person’s financial status, it might not be as favorable as the first option.

Now this may seem too good to be true, but I assure you it’s the current law of the land. The broad social-policy and economic trend is a shift from socialized benefits—either provided by government or corporations—to tax-incentives for individuals and families to accumulate funds to protect themselves and prosper.  Those who take the time to understand the rules will be the people who benefit the most.  This opportunity, after all, lies at the intersection of three complicated areas: tax law, health care policy, and investments.  Contact me it you want assistance determining how you and your family can leverage it for your financial plan.  After all, don’t you pay enough taxes already?

Mike Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT. He can be reached at or (203) 513-6032.

This article is not intended as legal, tax, accounting or financial advice. Michael is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, LLC.  Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. The opinions provided above are not necessarily those of MML Investors Services, LLC., and are provided  for general information purposes only.


i“Employer Health Benefits 2016 Annual Survey,” The Kaiser Family Foundation and Health and Research Educational Trust.

**Fidelity Investments Retirement IQ Survey, December 2016