Health Savings Accounts were introduced in 2003. With the skyrocketing cost of insurance, companies being able to offer high deductible health plans became a way to save money for the company and employees.
To qualify for an HSA, you would have to choose one of the high deductible health plans as your medical benefit and you can choose to make contributions into a Health Savings Account. A high deductible plan has an individual out of pocket maximum of $6550 and minimum deductible of $1300 for individuals (double for family plans).
For someone who doesn’t really have health issues and doesn’t go to the doctor a whole lot, this is an awesome little account to consider. Compared to your traditional health insurance options, going with a high deductible plan can save you quite a bit in monthly premiums, which means more money in your pocket. If we look at the HSA account itself, we start to see a stealthy investment account that can really benefit you later in life.
THE HSA ACCOUNT
For 2018, individuals can contribute $3450 into an HSA (Family= $6900). When you have an HSA, you will be issued a debit card which you can use to pay for eligible medical expenses and the money is deducted from your balance. For those interested or can’t sleep, here is Pub 502, detailing eligible medical expenses. Pretty simple.
But wait there’s more… HSA accounts offer a triple tax benefit. You read that right. Money contributed into the HSA comes out of your paycheck pretax/tax deductible. Money in an HSA can be invested in a selection of mutual funds and can grow tax deferred, and later on the money can be pulled from an HSA to pay for eligible medical expenses tax free.
The real life hack of an HSA comes from someone who treats an HSA as an investment account. You contribute to the HSA, invest it and leave the money alone for a while, pull the funds out later in life for health expenses (or at age 65, use the money for whatever and just pay taxes, but no 20% penalty).
Lets Look at an Example of the Triple Tax Benefit
For someone trying to lower their taxable income/save paying as much in income taxes, this is a great little extra amount of money you can sock away in a tax preferred account. Someone maxing out their 401(k)/403(b) of $18,500 for 2018 and also putting away $3450 into an HSA for the year has just been able to shelter $21,950 of their income from taxes. For someone in say a 33% marginal tax bracket, this equates to about $7243.50 in tax savings. Plus there’s a little extra side benefit on the HSA of not paying FICA taxes (that pesky Social Security and Medicare stuff you see deducted from your paycheck), unlike a 401(k) or IRA.
The second tax benefit…the tax deferred growth. Say you sock away the $3450 a year. You are currently a 35 year old healthy female planning to work until say 65. You invest the money from the HSA into a plain S&P500 index fund and over the long haul get a 10% return. Over time, what seems like a small $3450, grows to $567,504.37. All these years, the money grows and you don’t pay taxes on that growth.
The math on the financial calculator if you’re playing along at home:
PMT (annual)= 3450
I (rate of return)= 10%
N (number of years you contribute)=30
Again, we see the power of time, consistency, and starting early.
The third tax benefit…taking the funds out and using them for eligible medical expenses means tax free withdrawals. Again, look at Pub 502 above for the expenses. Here’s a cool hack that is still allowed on HSA accounts. If possible, pay for your medical expenses out of pocket, but save the receipts. This will allow the money in the HSA to grow tax deferred. Later in life, say at retirement, our lady above can reimburse herself from the HSA for all of those out of pocket expenses. This can equate to a nice first year of tax free money you can use for other purposes outside of medical. Remember, you’re reimbursing yourself for medical expenses you already paid. Totally legal and allowed by the IRS.
Let’s say you reach age 65, and have this nice balance in your HSA. You can actually use the HSA for non qualified medical expenses (think vacation) and you just pay your income taxes on it, like a 401(k) or Traditional IRA. Non qualified distributions after you are disabled are also an exception to the 20% penalty (and of course death). Prior to age 65, death, or disability non qualified use of the HSA is subject to income taxes and the 20% penalty… in other words…don’t do it.
Hopefully you are seeing the secret awesomeness of an HSA now.
But what if you don’t use the money in an HSA at the end of the year. Nothing. The FSA or flexible spending account is the use it or lose it account. If having to decide between FSA or HSA. Go HSA for the win. Again, an HSA does not have the use it or lose it provision on it. Look at our example above of the smart lady socking away the money.
What if I switch jobs? Have you ever rolled over an old 401(k) or IRA account. It basically works the same on an HSA. You can transfer your HSA to another HSA with your new employer, or if the employer doesn’t offer an HSA, you can move it to another HSA. But do your reseach, HSA‘s can charge a bunch of junk fees outside of your employer.
What happens to my HSA when I turn 70.5 year old? Nothing, RMD (required minimum distribution) rules do not currently apply to an HSA.
What if I die? You can name a beneficiary on your HSA. If your spouse is the beneficiary, the HSA will be treated as your spouses HSA after your death. If you name, say niece or nephew as a beneficiary, the account stops being an HSA and the market value of the HSA becomes taxable to the beneficiary in the year in which you die. If you estate is the beneficiary, the value is included in your final income tax return.
A side note on HSA accounts, since these plans save employers money, you may be surprised to find out that your employer will kick in money into the account. They will usually make you do a health screening. I received $550 on January 2nd in my HSA from my employer just to get my finger pricked and jump on a scale.
Here’s a fun little extra tid bit. I understand that investing in a brokerage account can be scary for a lot of folks, there are just so many investments you would have to decide to put your money in. Let’s say our 35 year old above just puts away the $18,500 and $3450 (total $21,950 annually) in her 403(b)/401(k) account and her HSA for 30 years and get a 10% return. She’d be on her way to accumulating $3,610,643.79. Not a bad balance.
Hope you find this info useful…
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Great primer. Eventually, I want my business to hire an accountant and include an HSA for myself. Seeing what folks spend at end of life is alarming. It would be nice to be prepared.
I finally have one of these. If the place where I worked for such a long time would have offered an HSA, I’d probably have $100k sitting in one right now. Amazing little accounts
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