It’s a win win – how come you’re not taking advantage of it?

Oh how I wish HSA’s had been around in the 80’s and 90’s so I could have saved for my future medical costs. I still feel like not enough people know about the terrific advantages of having an HSA. In a nutshell, HSA’s are like an IRA for your medical bills present and/or future. 

Health Savings Accounts (HSAs) were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses. Generally, an adult who is covered by a high-deductible health plan (and has no other first-dollar coverage) may establish an HSA. 

With an HSA, as of 2021, an individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,400) can contribute up to $3,600 — up $50 from 2020 — for the year to their HSA. Families can contribute up to $7,200 for 2021. 

Like an IRA, you can fund this account with pre-tax money. In other words, your contributions are tax-deductible.

You can open an HSA regardless of your income.

Here are some of the key points of an HSA (as outlined in “The Simple Path to Wealth” by JL Collins):

1. You must be covered with a high-deductible health insurance plan to have an HSA.
2. Your contributions are tax-deductible.
3. If you use a payroll deduction plan through your employer, your contribution is also free of Social Security and Medicare taxes.
4. You can withdraw the money to pay qualified medical expenses anytime, tax and penalty free.
5. Any money you don’t spend is carried forward to be used whenever you need it. (Don’t confuse HSA with FSA.)
6. Qualified medical expenses include dental and vision.
7. You can use your HSA to pay the health care costs of your spouse and dependents, even if they are not covered by your insurance plan.
8. If you withdraw the money for reasons other than to pay for medical expenses, it is subject to tax and a 20% penalty.
9. If you are 65 or permanently disabled, you don’t pay 20% penalty, just taxes if money is used for other than medical expenses.
10. When you die your spouse will inherit your HSA and it will become his or hers with all the same benefits.
11. For other than spouse heirs, it reverts to ordinary income and is taxed accordingly.

The above advantages should sell you on an HSA, but let’s look at some of the finer points which make an HSA a really great gift!

• • You are NOT required to pay your current year’s medical bills with your HSA.
  • If you choose, you can pay your medical bills out  of pocket and let your HSA grow. 
  • As long as you save your medical receipts, you can withdraw money from your HSA tax and penalty free anytime to cover them. Even years later!
  • If you plan to use this money to pay current medical bills, keep your HSA in a savings account.
  • If you choose to grow your HSA to pay future medical bills, you can invest it anywhere.
  • Once you reach the age of 65, you can withdraw your HSA for any purpose penalty free, but you will owe taxes on the withdrawal unless you use it for medical expenses.

• HSA’s are a great source of funds to pay medicare supplements and out of pocket healthcare costs in retirement.

Let’s consider this scenario. An HSA can act like a Roth IRA and an IRA at the same time! You get to deduct your contributions on your tax returns (IRA benefit) and if you invest it the earnings grow tax free (Roth benefit)! Win! Win!

So why not open an HSA, fully fund it, invest it, let it grow tax-free, save your medical receipts and reimburse yourself later, or use this tax-free fund to pay your retirement healthcare costs.   If you ever need the money it will be there for medical costs, but if not, let it grow tax-free to a potentially larger amount. 

You can run your own numbers, but I just used HSACenter’s calculator and did the following example:

• • Individual Annual Contribution $3,600 for 20 years = $72,000 total contributions
  • Invested at 7% (stock index fund) the value grows to $157,914 at the end of 20 years.
  • The tax benefit (Federal Tax 24%, State 5%) = $20,880 tax savings

In other words:

• • $85,914 (my investment grew by)
  • + $20,880 (taxes I didn’t pay) 
  • = $106,794 earnings on my $72,000 total contributions. 

Not bad! And I don’t have to pay taxes on it when I withdraw it for medical expenses! 

This is why I’m so passionate about everyone who qualifies opening an HSA and funding it for future medical expenses. 

I also get asked “where can I open an HSA?” According to Investopedia, these are the 7 Best Health Savings Account Providers for 2021. Your bank may also offer an HSA savings account which is ok if you’re going to use the funds to pay medical bills this year.  

If you have more questions about an HSA and it’s benefits, please schedule your free 20 minute money chat with me.