By: Ashley Reiter, CFP®, AIF®
Key Takeaway: Healthcare can be a financial burden. Use a health savings account to help protect yourself against healthcare costs.
Healthcare in America is pricey. Health insurance to pay for the healthcare is pricey. Employers are offering fewer health insurance options, and if you own a business, you already know how the high cost of health insurance can affect your bottom line.
But amid all this bad news, there’s a silver lining: the health savings account. If you are covered under what is considered a high-deductible plan (most of us are these days), you have access to a health savings account (HSA).
For 2018, you’re allowed to contribute $3,450 for a single account or $6,900 for a family account. This money comes out of your paycheck before you pay taxes and goes right into your HSA. You never pay any taxes on the money so long as you use it on qualified healthcare expenses.
Some employers even kick in a few bucks a year as a benefit. If that’s the case for you, just make sure that between what your employer puts in and what you put in, you’re not over the maximum amount allowed in a year.
How an HSA Works
Say you are covered under a high-deductible plan and you have access to a health savings account through work. Your employer contributes $1,000 a year to your HSA (nice!), and so you’re allowed to put in an additional $2,450 because you have a single account.
You are paid twice a month and fill out a form with HR to deduct $102 per paycheck to send to your HSA. You immediately get the benefit of reducing your tax liability (just like a 401(k) contribution).
Anytime you have a healthcare expense, you can use money you have in your budget, or you can pull it from your HSA. If you don’t pull the money from your HSA now, it’s saved for a later need for you or your family.
“But I Don’t Even Save That Much in My 401(k).”
Always save enough in your 401(k) to get your company match if they offer one. But you may consider using your HSA for any additional savings, and here’s why:
One single health event can be a big financial burden. We may not experience them all that often when we’re younger, but even at 29, I had to have a minor surgery. I had a high-deductible health plan and had to pay 100% of the cost of my surgery until I met my deductible.
If you don’t have the cash in an emergency fund and you’ve only been saving into your 401(k), you don’t have a ton of options to pay that bill. Taking the money out of your 401(k) will incur taxes and a 10% penalty. If you put the bill on a credit card, how long will it take to pay off, and what will it cost you in interest?
If you have saved even a little bit into an HSA, you can use that money free and clear. (Side note: Many healthcare providers will offer payment plans. You can still use HSA funds to pay your monthly payments!)
“What If I Never Have a Health Event?”
Do you ever go to a doctor or have kids who do? Do you wear glasses? Do you need dental work? You can use HSA funds to cover all of that. If you experience a lapse in employment, you can also use HSA funds to pay for COBRA premiums or other health insurance premiums while receiving unemployment benefits.
“What If I Leave My Job and Am No Longer Covered Under a High-Deductible Plan?”
Your HSA stays with you forever. You can still use the funds you’ve saved—you just can’t add to them anymore.
“I’ve Been Saving into an HSA for a Few Years—How Is That Going to Pay Off?”
Say you want to start a family, and it has become apparent that it might be a long road. Not all health insurance plans will cover infertility treatments, but you can use the HSA to pay for them. This is just one example, but it’s the unexpected life events like this that make HSAs worth a second look. Again, it’s a better option than taking money out of your 401(k).
“Can I Invest the Money in My HSA If I Don’t Use It?”
Yes. You can choose to leave all the money you save in cash if you’re planning to use it, or you can invest it appropriately for your situation. The investment gains are never taxed as long as they are used for qualified healthcare expenses.
“This Makes Sense, but Are There Any Catches?’
Not really. HSAs are a way to save money pre-tax to pay for healthcare now or in the future. Contributing lowers your tax liability today, you can invest the funds you don’t use and let them grow tax-free, and when you’re ready to use them, you can pull them out without paying any taxes.
• If both you and your partner have an HSA through work, you cannot both have a family HSA and each contribute $6,900. You’re limited to a combined $6,900 per year.
• Keep your receipts! Even if you have paid all your medical expenses out of pocket for years, you can still reimburse yourself from your HSA years later as long as you incurred the expenses after starting your HSA. Say you paid for $10,000 of medical expenses over the last 10 years (and you can prove it). You can take a distribution of $10,000 in year 11 and you’re good to go.
As always, your unique circumstances dictate the best option for you, so consult your tax advisor or financial planner to see if this strategy makes sense. Don’t have one? Feel free to reach out!
P.S. If you’re nearing retirement and have an HSA account or want to learn if an HSA can work as part of your retirement strategy, read this blog.
The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.