Today’s Marvelous Money topic is narrow in scope, but potentially huge in impact! It’s not something that was on my radar until John introduced the idea, and so I figured it might be the same for some of you. Basically, a Health Savings Account is the most “tax-preferenced” savings vehicle in the U.S. right now, and it’s something you should definitely consider taking advantage of! Let’s chat about why.
Of course, before you can take advantage of an HSA as a savings vehicle, you have to make sure it’s the right fit for you for its primary purpose: as a form of health insurance! That’s something only you can determine, but if you’re of average health, it’s worth considering.
An HSA is used in tandem with a high-deductible health insurance plan. A high-deductible plan means you pay a lower premium — the monthly cost of your insurance — but you are responsible for paying for expenses up to your deductible (currently defined as at least $2,700 for a family) and potentially up to your out-of-pocket maximum (at most, currently, $13,300 for a family). An HSA comes alongside your insurance plan to help you save for these expenses.
There are four main financial benefits of a Health Savings Account:
1. Your contributions are tax-free. Contributions to your HSA are 100% deductible (up to a max of $6,900 for a family in 2018). Because income is taxed after you make HSA contributions, you will be taxed as though you make less money — for example, if you make $50,000 per year and put $5,000 into your HSA, you will be taxed as though you make $45,000, lowering your tax burden.
HSA contributions are actually considered SUPER tax-free, because they are both income tax-free AND payroll tax-free! This all helps to reduce the amount you pay in taxes.
2. Your withdrawals are tax-free. Withdrawals to pay qualified medical expenses, including dental and vision, are never taxed.
3. Your earnings are tax-free. An HSA is an investment account (with the freedom to access mutual funds, stocks, or other vehicles of your choice) with the expectation that the money you invest will grow over time to help you pay medical expenses in the future. If and when it does, and you use it to pay qualified medical expenses, you won’t pay any taxes on it.
4. The money is yours. Unlike a flexible spending account (FSA), unused money in your HSA isn’t forfeited at the end of the year. It rolls over and continues to grow tax-free year after year.
Basically, an HSA combines ALL of the best tax advantages possible, while giving you the opportunity to save for future expenses you will almost certainly incur — since the average couple retiring at age 65 will spend $280k in medical expenses over the course of their retirement.
And, if at age 65 your HSA investments are super-successful and you have more money socked away in your account than you could ever need for medical expenses? You still have the option of withdrawing the money for any purpose and only paying regular income taxes (as you would with a traditional IRA). If you do so before 65, you’ll pay a hefty penalty.
As you may have guessed, an HSA and high-deductible plan is the health insurance option we’ve chosen for our family! Thanks to John’s employer, we are lucky to have a low out-of-pocket maximum, which makes an HSA pretty much a no-brainer for us. When we first opened the account, we started by contributing the out-of-pocket maximum each year (for us, lower than the IRS limit). Now, we’re able to contribute up to the limit — it’s our second savings priority after making sure we get our 401k employer matches. (Our mortgage savings account is third.) As with all investment accounts, the more we can put in now, the more time it has to grow, and the more we can make our money work for us!
P.S. If your health insurance is through your company, check to see if your employer will contribute to your account – many do!
Friends, I’d love to hear: do you have an HSA? Have you been able to take advantage of it as a savings vehicle?