5 Things You Need to Know about a Health Savings Account
What’s your coverage?
Have you been surprised by a bill from a doctor or hospital that says you owe a bunch of money? And you are wondering what your health insurance covers? It’s possible your health insurance plan is what’s known as a high-deductible health insurance plan, or “HDHP.” HDHP plans generally offer lower monthly premiums and may cover preventive care services (think annual physicals, asthma, and diabetes treatment), but they come with higher deductibles. This means you pay more of your health care bills for non-preventive health services.
Health Savings Accounts and HDHPs
A Health Savings Account is an option available to help those with HDHP plans. The cost of healthcare services and insurance coverage continues to rise and there is little we can do to control that. But you can control your use of health care services. That’s where HSA accounts come in. HSAs are like personal savings accounts you can use to pay for qualified health care expenses. You own and control the money in the account, which means you decide which health care expenses to pay out of your HSA. There are some powerful reasons to consider an HSA: (1) each dollar you contribute will reduce your overall tax bill, (2) money saved in your HSA account can be invested and any unused funds will grow, similar to your retirement accounts.
Millennials are the #1 Users of HSAs!
There are almost 30 million HSA accounts with over $80 billion in assets. And more and more people are opening HSA accounts every day. They are especially popular with Millennials; Millennials have the highest HSA participation rate, 17%, and also have the highest contribution rate at 5% of savings (Gen X: 4%; Baby Boomers: 2% of savings).
It is a trend that shows no signs of slowing and is an important piece of a comprehensive retirement plan.
- How do I open an HSA?
- Employer-offered HSAs are quite common, especially in large companies. When you enroll in your company healthcare plan, you’ll want to choose the high-deductible option.
- If your employer does not offer an HSA plan, you can find lots of options by doing an online search or checking with your bank or financial institution. As long as you are covered under an HSA qualified (high deductible) health plan, you should be able to open one on your own.
2. What are the risks of high-deductible plans?
An HSA goes hand in hand with high-deductible plans. There are several considerations when choosing such a plan:
a. This type of plan requires you to spend a large amount of your own money on a deductible before the insurance begins covering some of the cost. This will be at least $1,400 for an individual and $2,800 or more for a family.
b. Since it is coming out of your own pocket, it may be tempting to skip the care you need. You’ll need to be aware of that tendency and make sure you seek care when you need it. Preventative care is generally still free in-network.
c. The biggest “con” of a high deductible plan is that you might be faced with large medical bills that you can’t afford. A new diagnosis or emergency can result in a lot of out-of-pocket costs.
3. What limitations are there with HSA plans?
- Those who are covered by Medicare, Medicaid, TRICARE, the VA, Indian Health Services, or a spouse’s health plan don’t qualify for an HSA.
- When you reach age 65, you will need to make some decisions about when to take Social Security and enroll in Medicare. You might want to consider delaying so that you can continue to contribute to your HSA.
- If you are claimed as a tax dependent on anyone else’s taxes, you aren’t qualified to have an HSA that year.
- You can’t participate in Flexible Spending Accounts or Health Reimbursement accounts unless they are a specific type of plan.
- It is important to research your particular plan and make sure that it (and you) qualify for an HSA.
4. What are the tax advantages of an HSA?
HSAs provide tremendous tax advantages. With a trifecta of tax advantages, they are the most tax-advantaged account available today.
- Contributions to an HSA account come out of your paycheck before income taxes, which lowers your tax liabilities in the present.
- You can invest the money you put into the account in stocks, mutual funds, or ETFs. Any gains you accrue are not taxed.
- When you withdraw money to pay for a health expense, you don’t pay taxes on it.
In addition to tax savings, an equally important reason to set aside money in an HSA is the potential it offers for building your savings, in addition to those monies you have in your retirement and brokerage account. Similar to a traditional IRA or Roth IRA, invested funds grow tax-free.
The Power of Compounding
Consider this hypothetical example below. It illustrates how what may seem to be a small amount of money can grow into a substantial nest egg! This example assumes the household contributes up to the HSA family limit each year at the beginning of the year. Contributions are indexed to inflation and compounded annually. The account is invested with a 7% rate of return. The family withdraws 50% of contributions each year.
5. What are some other key things to consider?
- HSAs have no specific withdrawal requirements. It is your money to use when you like.
- The money in your account never expires and automatically rolls over from one year to the next.
- HSAs are completely portable. If you move or change jobs, you can transfer your funds to another HSA at any time.
- Once you turn 55, you can contribute an extra $1,000 yearly.
While HSAs can add greatly to your retirement savings, they are not a substitute for traditional retirement plans. For an in-depth look at the gains you can make with this type of account, you can view our webinar:
Ultimately, choosing a health plan is a decision based on an array of very personal factors and considerations. Since it is difficult to predict your health needs, there is necessarily an element of guesswork involved. If your budget can support an initial investment in an HSA, and you are able to keep adding to the account, it will be a valuable asset in retirement.