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Real Life Examples
As retirement plan administration professionals with 30 years of experience, California residents Mark and Alison are acutely aware of the skyrocketing cost of healthcare in retirement.
Recent estimates state that a healthy 65-year-old couple retiring in 2021 would need $662,000 to cover health and medical expenses through retirement (HealthView Services’ 2021 Retirement Healthcare Costs Data Report).
To prepare, Mark and Alison are using a little-known investment vehicle in a way many people didn’t know you could to save for the healthcare costs they’ll face. After just one investment, they’ve grown their savings for healthcare expenses faster than they thought possible.
“I think people are starting to realize now that their HSA is an investment account.”
Mark, Investor, California
Mark wanted to diversify his retirement savings while also dedicating funds for future healthcare expenses. With self-directed accounts, it is possible to invest beyond stocks and bonds.
Mark was already using this strategy to grow his retirement account, but wanted to do the same to prepare for healthcare expenses. He has long known what others are discovering: a Health Savings Account (HSA) can help him achieve that goal.
“I think people are starting to realize now that their HSA is an investment account,” Mark says.
Many people don’t realize that, in addition to self-directed IRAs, HSAs can be invested in a variety of assets in addition to stocks, bonds, and mutual funds.
His account provider did not offer an option for self-directing a Health Savings Account into alternative investments, so they searched for a self-directed custodian that did. Their search led them to Equity Trust Company, where they opened a self-directed HSA.
Mark and Alison hoped to start small with passive investments that netted a decent rate of return.
“When I’m looking at HSA money, I want to be conservative with it but I also don’t want to earn 2 percent,” Mark says.
The first self-directed investment in Mark’s HSA exceeded his expectations.
In September 2016, Mark and Alison learned of an opportunity to invest in an equity share in an apartment complex through a commercial real estate investing platform. The investment would fund the rehab and resale of an apartment complex, and the real estate investing platform offered 10-percent interest, plus a share in the capital gain on the sale.
Mark directed Equity Trust to invest $20,000 from his HSA account. This can be done online via Equity Trust’s account management system myEQUITY. Equity Trust sends the funds per your direction.
Mark and Alison expected the investment to pay off after three years, but the property sold at a significant profit after two years. After the sale, $38,000 in tax-free profits was returned to Mark’s HSA.
“For an HSA investment, which is generally very conservative, this was a great way to boost the account value,” Mark says.
The couple is now reinvesting the HSA into another private equity opportunity: a venture capital investment that they hope will earn a 200-plus percent return within three years. They plan to repeat the process with new investments every two to three years.
“It allows us to just sit back and let the cash flow roll in,” Mark says.
Mark plans to let the account grow for at least five to seven years before making it available for withdrawals. When he is ready to use the funds, they can be withdrawn to cover a wide array of healthcare expenses. (For the entire list, see IRS Publication 970.).
Video: Private Entity Investing in a Self-Directed Account
The HSA is often referred to as a triple-tax-advantaged account: Contributions are tax-deductible, the account grows tax-free, and withdrawals – when used for qualified medical expenses – are tax-free.
How are funds transferred to Equity Trust?
What investment options are possible with an Equity Trust account?
Case studies are provided for illustrative purposes only. Past performance is not indicative of future results. Investing involves risk including possible loss of principal. Information included in the above case study was provided by the investor and included with permission. Equity Trust Company does not independently verify all information provided by third parties.
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