30 Day Investing Challenge, Day 25: The HSA Shoebox Strategy

In everything in life there are beginner, intermediate, and advanced topics. Throughout this challenge each day increased the level of difficulty gradually so that you slowly became an investing expert. But now it’s time to dive into some advanced and uncommon investing strategies that can take your wealth to the next level.

One of my favorites is the HSA shoebox strategy. If you don’t have access to an HSA, hang on before you close your window. There may be a time when you’re able to invest in an HSA and knowing there’s a powerful tool you can use to grow your wealth exponentially using this account will come in handy.

HSA Recap

Let’s recap how HSAs work:

• You qualify for them through a high deductible health plan, either through your workplace or through the healthcare exchange.

• If you receive healthcare through work, they will provide you with the account (and may even give you matching dollars).

• If you have to buy your insurance independently you can open an HSA yourself.

• HSAs have what is called the triple tax advantage:

  • Your contributions are tax free.

  • The money grows tax free.

  • And you can pull the money out for qualified medical expenses tax free.

• If you don’t spend the money on qualified medical expenses you can use your HSA as a regular retirement account once you reach age 65 — this means you can withdraw money for any expense but will have to pay taxes on it.

The Shoebox Strategy

What if I told you there’s another way to access your HSA money, tax free, and before age 65? With this little known hack you can do just that. HSA shoeboxing takes advantage of the stipulation that you can use HSA money at any time to pay for medical expenses. You don’t have to use that HSA money in the same year you incur the medical expense (this is how an FSA works). If you save diligently in your HSA for 5 years and have $25,000, then have a medical procedure in year 6 that costs $10,000: you can use your HSA money to pay for the whole thing.

So this is one cool thing about HSAs, but it’s not the cool thing. Given the above, here is how the shoebox method works:

• You put money in your HSA tax free.

• You invest everything above your deductible in a total stock or S&P 500 index fund.

• You pay for all of your medical expenses out of pocket — meaning you don’t use the HSA money).*

• You save all the medical expense receipts you paid out of pocket — I have them emailed to me and save them in a “shoebox” folder in gmail.

• You let the money grow 10, 20, 30 years.

• You pull the money out after it’s hit several hundred thousand dollars and pay for all those old medical expenses you saved receipts for.

And here’s the even cooler part (I know, how could this possibly get better, right??)" — what’s considered a medical expense:

• Deductible payments

• Surgeries, even elective ones

• Copayments

• Lab work

• Prescriptions

• Over the counter medications like Advil, Tylenol, or even your melatonin gummies

• Feminine hygiene products

• Bandaids

• Topical ointments

• Even condoms!

The list goes on and on. You can see all the items in the IRS’s Publication 502 (skip to page 5). Now do you see how powerful the HSA is?

Action Step: Take Advantage of Your HSA

If you have access to an HSA and haven’t taken advantage of it yet, now’s your chance. You probably took some action on day 12, but there’re more steps you can take:

1. Check if you’re in a qualified high deductible medical plan (the plan documents will tell you if it’s HSA eligible).

2. If you get the health plan through your workplace, ask your HR or equivalent department how to open your HSA account.

3. If you buy the health plan yourself, open an HSA account (I like Fidelity’s).

4. Start contributing an amount that makes you comfortable and fits within your pre-determined savings amount from challenge day 17.

5. At first you’ll want to save enough to cover your out-of-pocket maximum deductible, but once you get past this point you can start investing the money in a total stock market or S&P 500 index fund.**

6. If you’re able, try and pay for your medical expenses out of pocket. If that’s not possible right now and you need to use the HSA money, it’s still a great idea to contribute so you get those tax savings.

I’ll see you back here tomorrow for another advanced investing topic: the Roth conversion ladder.

*I want to note that the shoeboxing approach is not set up for everyone. Folks with chronic diseases, kids, or who just need to see a doctor a lot and can’t pay for a multitude of medical expenses will probably need this money right away. Or they may not even have a qualified high deductible medical plan to begin with.

**The contribution limits for 2024 are: $4,150 for single filers, $8,300 for families, and you get an extra $1,000 in catch up contributions if you’re over 55.

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