The Hidden Power(s) of a Health Savings Account

investing retirement Oct 20, 2021

Ah - medical benefits/insurance - yet another thing that slaps you upside the face when you enter adulthood and makes you think "I am supposed to understand all of this?!" and/or "Did I miss a class in school?" 

 

That was definitely me when I reached the ripe age of 26 and got booted off of my Dad's health insurance, something I was grateful to hang onto until then.

And it's that time of year, annual enrollment. Many of us are going through the process of selecting and signing up for our medical insurance for 2022. 

 


 

So, let's talk about Health Savings Accounts (HSAs).

HSAs are extremely powerful vehicles when it comes to retirement planning. Yes, I said retirement planning.

 

BUT - one thing I have noticed time and time again over the years - is that many people do not understand the unheard-of advantages an HSA provides. I mean, rightfully so, unless someone has sat you down and explained everything an HSA offers... ya don't know what ya don't know! 

And oftentimes - many people dismiss the opportunity to have an HSA altogether simply because a high deductible health plan (HDHP) sounds risky or expensive if something unexpected were to happen. 

I can recall one year a former boss of mine told me during annual enrollment "Whatever you do, you don't want the high deductible health plan because if you get pregnant, it's going to be expensive!!"

RED FLAG here, I bit my tongue at this comment and proceeded on my way. BUT had I not had the knowledge I did, I would have totally dismissed the high deductible plan without even blinking an eye. 

Alright, so let's get into it...

FIRST, I am going to break down the advantages of HSAs and some of the hidden powers within this investment vehicle. Yes, it is an investment vehicle. 

THEN, I'll get into why it makes sense for me right now and how to think through if an HDHP with an HSA makes sense for you. 

 

How do HSA's work?

First things first, one of the reasons why I believe there is a lack of knowledge around HSAs is because they didn't come into existence in today's form until relatively recently when President Bush expanded Medicare in the early 2000s. 

HSAs are tax-advantaged individual savings accounts designed specifically to pay for the medical expenses of individuals who are enrolled in high-deductible health plans (HDHPs). 

You’re eligible to have contributions made to an HSA when your medical insurance is a high-deductible plan that is HSA-eligible. Not all high-deductible plans are HSA-eligible, though. 

Your healthcare plan is HSA eligible if the deductible is within certain limits...

For context, this year in 2021,  those limits are:

Individual: Deductible within the range of $1,400 - $6,900
Family: Deductible within the range of $2,800 - $13,800

When you're eligible for an HSA, anyone can make contributions to your HSA as long as the total contributions don’t exceed the annual limit.

Many employers offer contributions to your HSA (mine, for example, contributes $500 annually), and obviously you as the individual with the account can make your own contributions. 

There are also CONTRIBUTION LIMITS for HSAs because they are so incredibly awesome. I'll get to the benefits up next here... but the government has to set limits on what you can drop into them due to the MAJOR tax advantages ;)

 

For this year, 2021, below are the annual contribution limits: 

Individual: $3,600

Family: $7,200

 

For next year, 2022, below are the annual contribution limits:

Individual: $3,650

Family: $7,300

 *If you are over age 55, you can make an additional $1,000 contribution on top of the above limits. 

 

Alright now that we have the lay of the land 1) how to know if you qualify for an HSA and 2) how much $$$ you can drop into it... let's get into the benefits and how you can use them to help you WIN WITH MONEY.  

 

The Benefits of HSAs

..... are pretty great. Here they are: 

  • TRIPLE TAX ADVANTAGE - an HSA is the ONLY triple tax-advantaged investment vehicle out there... let me explain...
    • Contributions made to HSAs are pre-tax. Just like a traditional 401K or IRA, contributions that you make into your HSA are deducted from your gross income (which can help lower your tax bracket)
    • Growth is tax-free: Growth? Yes, you heard that right. The money within your HSA can (and should!) be invested. Once invested, any growth on that money is tax-free... just like in an IRA.
    • Withdrawals are tax-free (for qualified medical expenses): Meaning when you take money out of your HSA for a qualified medical expense... you are again, not taxed. Oh, and the list of qualified medical expenses is comprehensive. Sunscreen can be purchased from your HSA, menstrual products, breast pumps and accessories, even masks or face coverings.   
  • YOU OWN YOUR HSA! - HSAs are highly flexible and they are not tied to your employer. Your HSA account is yours and it stays with you for life. Unlike Flexible Spending Accounts or FSAs, HSAs are not use it or lose it. The money rolls over, stays with you, and continues to grow. Also with an HSA, you're not "locked-in" to the contribution amount you selected when you enrolled. 
    •  When you reach age 65 or later, money in your HSA can be withdrawn for medical expenses tax-free OR you can use the money for whatever the heck you want. If you choose to withdraw the money to buy an Airstream, for example, you will pay taxes on the withdrawal just like you would a traditional IRA. 
  •  No closing date for receiving reimbursement of medical expenses: What does this mean? This means that you can pay out of pocket for medical expenses now, let the money in your HSA compound tax-free, and then 35 years down the road in your retirement years, you can withdraw the money you spent out of pocket for medical expenses years back without paying any taxes.
    • The key here is, you have to save your receipts. But yeah, this is huge. Let's say you live beneath your means and covering medical expenses out of pocket is not a financial burden for you now... so you do that. Those expenses add up to about $20K over time and in retirement you want to buy your grandson a car for his 16th birthday. You can pull out those receipts and withdraw that $20K tax fee years later!! HUGE. 
    • This strategy also enables you to utilize your HSA as kind of an additional emergency fund, if you will. If you have $5K worth of receipts saved up from out-of-pocket medical expenses, you have some peace of mind that if for any reason you needed $5K, you can get it from your HSA at any time. 
  • No required minimum distributions during your lifetime: yep, you heard that right. This isn't like a traditional retirement account where you have to start making withdrawals at a certain age. Your spouse or beneficiary can inherit your HSA and have all the benefits you did. 

 

 

Thoughts & Concerns around High Deductible Health Plans - does one make sense for you? 

 

Undoubtedly, one of the biggest concerns with an HSA is that you have to opt into the HDHP. 

While HDHPs do not make sense for everyone, they are not as scary as they seem. My husband and I both have had HDHPs for a while with ER visits and some unexpected medical issues along with it. 

Here's the deal with HDHPs - at the end of the day, it is insurance! With this insurance, you still get a sizeable amount of coverage.

For example, most HDHPs include 100% coverage for wellness visits, vaccinations, and your typical basic annual needs. Alongside that, with most HDHPs other services are covered at 80% after the deductible is met - and then there is an out-of-pocket maximum that, once met, the plan pays 100% after that. 

Here is what my HDHP looks like for example: 

For context: I am on my own insurance with my employer and my husband is on his own with his employer, this route is more cost-effective than us being together on one.

My calendar year deductible is $1,500 for me as a single individual 

My out of pocket maximum is $3,500 for me as a single individual

What does this mean? AT THE ABSOLUTE MOST in one calendar year, I would have to pay $3,500 before my plan starts paying 100% of costs. 

Yes, $3,500 is a lot of money, but I have a fully-funded emergency fund and I live well below my means. So, in the event I needed surgery or say a hospital stay - AT THE VERY MOST I am paying $3,500 and I am totally cool with that because the above benefits of an HSA far outweigh. (Not to mention, if I wanted to use my HSA to pay the $3,500 I can!).

I am 30 years old and have been working/living on my own since age 22. I have only had 1 year where I had to pay out of pocket for things due to some unexpected health complications that required a colonoscopy - okay now I am oversharing. 

But my point is - in the past 8 years with the exception of 1 - the only care I have needed has been preventative which has been 100% covered meaning opting into the HDHP and contributing to an HSA is paying off big time. 

I am very grateful for my health - and I recognize many need more than the covered preventative care on an annual basis.

I am simply painting the picture that an HDHP with the HSA might be the most financially savvy route when you actually sit down and crunch the numbers.

It depends on factors such as your health history, the health of your family if they are on your insurance and the deductible for your HDHP has as well as the out-of-pocket maximum. For those with large families or medical conditions that consistently would have you paying up to your out-of-pocket maximum year over year - an HDHP probably would not make sense. 

 

To conclude...

HSAs are very powerful investment vehicles that can be used to invest for medical expenses as well as retirement. 

High Deductible Health Plans are not something to shake a stick at - it might not be the right solution for you - but do your research and thoroughly understand before turning your shoulder.

Many fail to understand & maximize the full benefits that an HSA offers. Don't let this be you if have an HSA!

 

Cheers to winning with Money!

-Mal

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