HSA 101
June 3, 2021

The Shoebox Strategy for Retirement and Your HSA

If you fancy yourself as a bit of a savings savant, then you're probably familiar with the so-called shoebox strategy as a way to maximize your retirement savings with the help of a Health Savings Account (HSA). A quick refresher—an HSA is a type of savings and investment account paired with certain high deductible health plans. The HSA is a great tool for saving on taxes since contributions are tax-deductible (or made pre-tax if contributed via payroll). You don't pay tax on any withdrawals used to pay for qualified purchases and expenses, and any gains made in HSA investments are tax-free. 

So what's this about a shoebox, then? Well, a shoebox isn't just a great place to keep your new Nikes fresh (or your old receipts for your 2019 taxes which you're definitely going to file this weekend); it's also a savvy financial strategy that maximizes the efficacy of your HSA. And coincidentally, it does involve saving your receipts!

How the shoebox strategy works

The shoebox strategy is a long-term savings strategy for hacking your HSA's tax advantages. Instead of using your HSA to reimburse yourself immediately after incurring an eligible medical expense, you wait to reimburse yourself (and lessen the burden of your tax bill since withdrawals are tax-free). You can claim medical expenses any time after you establish your HSA, which means you can reimburse yourself whenever is convenient for you. In the meantime, the funds in your HSA can continue to grow tax-free.

Here's how you do it:

1. Pay for medical expenses and save the receipts.

Instead of using your HSA to pay for a medical expense right away, you pay for it out-of-pocket and keep the receipt (that's where the shoebox comes in). Leave your HSA undisturbed and archive your receipts somewhere safe, where you know you'll still find them years down the road. This is next-level bookkeeping, but it'll pay off!

2. Invest in high-yielding stocks, bonds, ETFs, etc. 

This is your HSA's time to really grow undisturbed. Since you don't pay taxes on any growth your investments generate, you'll reap the benefits the longer you allow your assets to grow. Your HSA can hold any investments: Stocks, bonds, ETFs, mutual funds, cryptocurrency, and so much more. Just make sure to regularly contribute to your HSA to get the ball rolling on that compounding effect. Over the years, your HSA will grow to become a sizable nest egg.

3. Reap the benefits.

Let's say it's 20 or 30 years after you've started your HSA, you're enjoying retired life, and you want to dip into that HSA. Dig out those receipts and go to town. Just submit the receipts for the qualified expenses and enjoy a tax-free reimbursement that you can use for anything you want. Holidays, a new home, starting a college fund for your grandkids— whatever your heart desires! 

As you can probably tell, the shoebox strategy requires a lot of discipline upfront. It would be best if you stayed adamant about not withdrawing from your HSA before the investments in the account have had time to grow. You'll also need to be able to cover the costs of any HSA-eligible medical expenses on your own. But if you're able to do this and diligently tend to your investments, then you'll reap the benefits of your bountiful HSA in retirement.

Continue Reading