So many of us in the past few years have moved to high deductible health insurance plans. For my family of 7 it’s the only affordable option. A true high deductible plan (meaning you have to pay everything until you reach the deductible) has one largeperk that many people over look. You may find that you actually want to pick a high deductible plan after considering this.
Before I go further keep in mind that many high deductible plans still have the same “Max out of pocket” amounts as traditional co-pay plans. However most traditionalplans do not count doctor visit co-pay or medicine co-pay amounts towards the max out of pocket. So if your plan has $6500 as your max, you could end up paying around $7000+ once you factor in all theco-pays for each visit and medication! For folks on a high deductible plan, every dollar you pay applies (even medicine) to the deductible, and once the deductible is met they pay everything.
Paying less each month and paying less total out of pocket already gives a high deductible plan two gold stars in my book. There is another reason though that sold me on this plan, Health Saving Accounts.
What is a Health Savings Account?
With any true high deductible plan that has a deductible of at least $1,300 for singles or $2,600 for families you are eligible to open a Health Savings Account. Many people get them confused with Flexible Spending Accounts, and that is a horrible mistake. That makes your accountant cry (or turbo tax if it knew how to cry for you).
Health Savings Accounts are a magical world of tax freeness that anyone eligible should take advantage of. You can put up to $6,750 a year (or $3350 for singles) into a HSA and all the money goes in tax free. Meaning the IRS looks at it as if you made $6,750 less than you really did. This lowers your federal tax levels and also you don’t pay Medicare and Social Security tax on contributions. Total that is around a 20% in tax savings for most tax payers. As long as you use the money to pay for health care needs it will always be tax free, even on the interest the account earns. No other investment account is like this! Retirement plans are either tax free when you put the money in or when you take it out, but not both.
You can put your money in and use it the same year to pay deductibles and other needs, and you’ve already saved the amount of your tax bracket just by “funneling” it through your Health Saving Account (very mafia sounding I know). The better financial option (if you can afford it) is to use your Health Saving Account as a long term savings account though. The money you put in can sit in an HSA account for as long as you want, you don’t have to use it this year or next year. You don’t even have to keep the health insurance plan you have, they won’t take your money from you. You can invest the money in mutual funds, earning a good 7-10% interest every year… As long as you eventually use it for health care needs that money still comes out tax free.
Humor me for a moment and let’s pretend you put $3,000 in an HSA account this year that is invested in mutual funds earning a very basic 5% APR. You invest this for 8 years and then switch insurance plans and never invest another dollar.
In 20 years you’ll have $44,145 in the account. You only put in $18,000 of that. The other $26,145 is your earnings, tax free earnings… Save this for when you are older and you’ve funded your own long term care. In 10 more years (30 years total) you’ve got $82,000 in the account!
These are very conservative numbers since you could invest up to $6,750 if you are married and earn higher interest as well.
How to Get Started
I doubt that most of us have $6,750 lying around waiting to be put into an account. Don’t let that thought stop you. Lets start small. Open a Health Savings Account account either at a local bank or online. Most have no fees to open them and no maintenance fees either. We went with Health Equity online because they allow mutual fund investing (most local banks don’t). Start by just putting in what you think you’ll use this year. Look at how much you spent last year on medical needs and divide that by 12. Then go ahead and save that monthly amount working towards thatannual need.
At the end of the year if you didn’t need everything you put in, then you are officially started towards long term planning. Save what you didn’t use this year and keep adding next year just as you did. Little by little your account will grow!
Start Now
If you have a high deductible health insurance plan as of December 1st of this year you can contribute to an HSA right now. You actually have until April 15th to contribute for 2016, so you could play catch up if you wanted and put some money in now towards this years taxes and then still put money in next year.
Don’t let the $6,750 sound so big that you don’t start saving anything. Focus on what you can put in, and you’ll still reap the rewards of saving. No matter what, every dollar you put in will save you an easy 15-20% in taxes but for some of you (all my fellow self employed folks especially) it could be saving upwards of 40% in taxes on the money saved!!
To sum it up here’s a great chart from Health Equity:
FAQs
An HSA allows you to put money away and withdraw it tax free, as long as you use it for qualified medical expenses, like deductibles, copayments, coinsurance, and more. (Generally, insurance premiums aren't considered qualified medical expenses.)
How much should I have in a health savings account? ›
The short answer: As much as you're able to (within IRS contribution limits), if that's financially viable. If you're covered by an HSA-eligible health plan (or high-deductible health plan), the IRS allows you to put as much as $4,150 per year (in 2024) into your health savings account (HSA).
What are the requirements for a health savings account? ›
Individuals Who Qualify for an HSA
- Be covered by a high-deductible health plan (HDHP) on the first day of the month.
- Not be covered by other health insurance (see Publication 969 for exceptions)
- Not be enrolled in Medicare (the individual can be HSA-eligible for the months before being covered by Medicare)
Advantages of an HSA
Withdrawals are tax-free as long as they're used to cover qualified medical expenses. You can use HSA funds now and in retirement. You, an employer, a relative or others can contribute to your HSA. There are no time constraints for spending the funds.
What happens if I never use my HSA account? ›
With an HSA, there's no “use it or lose it” provision. This is one of the primary differences between an HSA and an FSA. If you put money in your HSA and then don't withdraw it, it will remain in the account and be available to you in future years.
What are the pros and cons of an HSA? ›
Limitations with Non-HDHP Coverage
| Pros of HSAs | Cons of HSAs |
|---|
| Flexibility and Control - Ownership stays with the individual. - Funds can be used for a broad range of healthcare costs. | Complexity in Management - Requires detailed tracking of transactions and receipts. - IRS regulations can complicate expense tracking. |
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The short answer is that it's unlikely, largely because HSAs have generous features around withdrawals. In a worst-case scenario where your HSA account balance exceeds your expected healthcare costs, you have two key ways to get your money out sooner without negating the tax benefits of the HSA.
Should you spend your HSA or save it? ›
How you use your HSA really depends on your health care needs and longer‑term goals. It's all about balance: Spend when you need to and save as much as you can to take advantage of the benefits of your HSA that can help you be ready for the future.
Can I take money out of my HSA? ›
Use for qualified medical expenses
Your HSA can also function as a backup emergency fund, letting you withdraw tax-free cash when you really need it. You can only do this if you delay reimbursing yourself for previous medical expenses you paid out of pocket for.
Who cannot contribute to an HSA? ›
If you are enrolled in Medicare, you cannot contribute to an HSA, but you can still use any remaining funds in your account to pay for eligible medical expenses. Check to see if you are HSA-eligible every month to avoid any surprise taxes or penalties later on.
Our experts chose Fidelity because the brokerage offers two HSAs and multiple ways to invest, including with the help of a robo-advisor. While most HSAs require you to pick your investments, Fidelity has a self-directed option (Fidelity HSA) and a managed, robo-advisor option (Fidelity Go HSA).
Why is my HSA being taxed? ›
If your funds are used for non-eligible expenditures, you may be subjected to income tax plus a 20% IRS penalty. However, that doesn't mean you should neglect your HSA. After age 65, you are allowed to withdraw from your account penalty-free for non-eligible expenses, as long as you report it as income on your taxes.
What is the 12 month rule for HSA? ›
The last-month rule comes with an important catch, though. You must stay enrolled in an HSA-eligible health plan for a one-year "testing period" running from December 1 of the year you contribute to December 31 of the next year.
How does an HSA work for dummies? ›
An HSA allows you to pay lower federal income taxes by making tax-free deposits each year. You can enroll in an HSA-qualified high-deductible health plan during open enrollment or a special enrollment period. Deposits to your HSA are yours to withdraw at any time to pay for medical expenses not paid by your HDHP.
Can I open my own HSA even if my employer offers one? ›
Yes. The HSA belongs to the individual not the employer and any eligible individual may open an HSA. As long as you are covered under a High Deductible Health Plan (HDHP) you may open and contribute to an HSA.
Is investing your HSA a good idea? ›
Comparing HSA to 401(k)
When it comes to retirement, everyone talks about the 401(k). But your HSA can be one of the best accounts for saving for retirement. Not only can you invest1 your HSA and potentially capitalize on tax-free growth, but your HSA also delivers powerful tax advantages you can't find anywhere else.
Is a health savings account better than a 401k? ›
If you want money you can tap at any time for medical emergencies, an HSA is a better choice. You can make hardship withdrawals from a 401(k) for medical expenses, but you'll have to pay taxes on them.
Can you use HSA for gym membership? ›
Gym memberships. While some companies and private insurers may offer discounts on gym memberships, you generally can't use your FSA or HSA account to pay for gym or health club memberships. An exception to that rule would be if your doctor deems fitness medically necessary for your recovery or treatment.
