When saving for and spending money on health care costs, it is crucial to take advantage of every cost saving measure you can. With the cost of insurance premiums skyrocketing every year and a new administration in the White House looking to repeal and replace the current system, it is important to save what you can in order to fund your future medical expenses.
In comes the Health Savings Account, which is a saving and investment account unlike any other in the American tax code. Today, I am going to shine a little light on the HSA, which is becoming more popular and used in more creative ways with each passing year.
What Is An HSA?
An Health Savings Account (HSA) is a tax-advantaged savings account used in conjunction with high-deductible health insurance. Money moved into an HSA is tax-deductible and grows tax-deferred while in the account.
When medical costs arise, you can use the money in your HSA to pay the deductible. Once your deductible is met, then the insurance policy will begin to pay the medical costs, which will vary based upon your specific plan.
Advantages of an HSA:
- Lower healthcare premiums when using a high-deductible plan
- Tax-deductible contributions
- Tax-deferred growth of money in HSA
- Tax-free withdrawals when used for qualifying medical expenses
- Not a “use it or lose it” plan, meaning you do not lose any unused contributions for the year
Do I Qualify?
In order to be eligible for an HSA, you just need to confirm these few requirements:
- You must be covered under a qualified high-deductible health insurance plan. In fact, your health insurance plan information will indicate whether or not your plan is HSA eligible, or not.
- You may not be covered under another health insurance plan.
- You may not be enrolled in Medicare
- You may not be another person’s dependent. If you are on your parent’s health insurance plan, they will be able to use their HSA for your healthcare expenses.
How Do I Contribute?
Contributing to your HSA can be done in two ways. Either you setup the account yourself and contribute from your checking account, or your employer sponsors an HSA in your benefits package and you can have your contributions taken from your paycheck.
If your employer offers an HSA within your benefits package, it is usually easiest to utilize this plan and have the contributions come out of your paycheck. This way, you will receive the tax-deductions immediately, much like contributions to your 401(k) plan.
If you have an HSA on your own, you may make contributions from your checking account. When filing your taxes the following year, you will then receive the tax-deductions for your contributions.
How much can you contribute to your HSA? I thought you’d never ask..
- In 2017, singles may contribute $3,400 and families may contribute $6,750
- Individuals ages 55+ may contribute an extra $1,000 per year.
Opening An HSA
Much like opening an investment account, opening an HSA can be done quickly online. If your employer does not provide an HSA option in your benefits package, you will need to search for various HSA providers to find the best fit for you. Using a site like HSA Search will help tremendously in this effort.
If your employer offers an HSA, then you will need to contact your HR representative to see when you are eligible to enroll. Your enrollment will also be online and you can direct a certain dollar amount from each paycheck to go to your HSA.
Much like investment fees, you need to be aware of how much your HSA is charging you, as little fees can add up. Here are the main fees you will most likely incur:
- Setup fee to open your account
- Monthly maintenance fee
- Debit card fee
- Investment fee
The low-cost provider is not always the best option. Finding the provider that offers what you need is best. Some providers do not provide investment options, while some do. Some providers will require a high cash balance, while others will not.
Every HSA provider has a different fee structure, which makes it very important for you to do your homework and find the best fit for you.
If you use your HSA as I have described above (contribute regularly and spend the money on medical expenses as needed) you will receive nice tax benefits instead of just paying your medical expenses out of pocket. However, there is another way you can supercharge your HSA.
Use your HSA as an additional retirement account. Since you don’t have to spend your HSA contributions each year and you can invest the contributions you make, you can ultimately treat your HSA like an extra retirement account.
Much like a traditional IRA, your contributions to your HSA are tax-deductible and grow tax-deferred. Also, when you withdraw your IRA proceeds after age 59 ½, you realize those dollars as ordinary taxable income. With an HSA, when you withdraw your proceeds after age 65, you also realize those dollars as ordinary taxable income. Effectively the exact same scenario, with a little longer waiting period in your HSA.
In retirement, we all know that our medical costs will increase as we age. You can make withdrawals from your HSA for medical expenses without being taxed, as described above. You may also use an HSA for long-term care expenses. With long-term care expenses increasing each passing year, an HSA is a fantastic way to have a “medical expenses bucket” saved up as an emergency fund in retirement.
Is an HSA right for you? Be sure to consider your current family needs and if moving from a low-deductible health plan to a high-deductible health plan will save you money. You may find that now is not the right time if you have or are expecting high healthcare expenses in the near future.
If now is the right time for you to open an HSA, talk to your employer to see if they offer a plan, or start your search online to find one that fits your needs. Take control of your savings now, so that you are not solely dependent on government health benefits in the future.