Real Estate Investing with your Health Savings Account
by New Direction Trust Company
While the healthcare industry continues to promote the growth of Health Savings Accounts (or “HSAs”), the versatility of the HSA may still contain a few surprises, even for those who have held their accounts for many years. For instance, how many know they can buy rental property with their Health Savings Account? “Not many” would be a safe bet.
Although many Health Savings Account owners spend their saved money for current expenses, HSAs are designed to be savings vehicles for future expenses as well. In fact, Congress set the HSA investment rules to be identical to those for Retirement Accounts like IRAs, thus empowering HSAs to grow through investment returns, like IRAs. However, a Health Savings Account targets savings for specific expenses in retirement: medical expenses. In fact, when it comes to this purpose the tax treatment of an HSA is better than that of all other Retirement Accounts, though the HSA can be used for other, non-healthcare-related expenses as well. Nearly two decades after their creation we see HSAs largely mirroring Retirement Account investments in several intuitive, and sometimes surprising ways. We’ll focus on one here.
Most of us will become familiar with real estate over our lifetimes. Many will start out as renters, later becoming owners, and a sizable minority will eventually become owner-lessors (landlords). Many find comfort in investments they can touch. Some appreciate the opportunity, though by no means the requirement, to exercise their handyman skills and small business acumen. Others still find they like the asset diversification direct investing in real estate provides, as well earn a return uncorrelated with public markets.
Unbeknownst to many, investing in real estate is allowed through an IRA. In fact, the US tax code simply lists only investments specifically not allowed, such as collectibles, leaving the door open to all others. A small but growing group of investors have been investing in real estate through their IRAs for over two decades. A much smaller group has even discovered they can use their HSA balances to purchase investment property, again using the same tax rules. They can even have their HSA partner with their IRA or other Retirement Accounts in the real estate purchase. Similarly, HSAs can also invest with other investors in a common investment. Those other investors could be HSAs, IRAs, or just other investors with personal funds. With this type of pooling available, an HSA need not contain a large balance to access real estate investments.
Similarly, IRA account holders who buy and rent homes through their IRAs can obtain mortgage loans on their IRA investments, just like they can with their primary residences. Here again the same rules apply to HSA funds. In both of these cases, as well as other owner-controlled tax-deferred investment accounts, the account holder can select and even capitalize their investment (i.e. debt or no debt) as they see fit.
As healthcare continues to evolve and individuals seek to make the most of their health savings contributions, financial advisors and their clients will increasingly look for untapped areas of economic growth potential. Real estate is the single largest asset class and often a families’ largest investment, making the asset both familiar as well as potentially appropriate to consider as a long-term investment in a diversified portfolio. Further, with the added benefit of deferred taxes in traditional IRAs and potentially tax-free treatment of earnings in Health Savings Accounts, there are even more reasons to consider looking outside of the traditional public offerings to find allowable, if often overlooked, investment options.