Get to Know the HSA and Better Understand Your Options
Health Savings Accounts (HSAs) are a tax advantaged way to reduce medical expenses. Here’s what you should know about HSAs and how they can be healthy for your finances.
There is a lot of confusion around Health Savings Accounts or HSAs. According to Geri Allard, Education Consultant with Fidelity Investments, the HSA is often referred to as a Medical 401(k).
With open enrollment approaching, it’s good to understand your options. Many people default to the plan they’ve always chosen without considering the alternatives.
HSA and High Deductible Health Insurance Plan
The Health Savings Account is always tied to a high deductible health insurance plan. People worry about having to meet a high deductible even though the premiums are lower than that of the standard plan. That can be scary if you don’t have $3,000, $5,000 or even more set aside.
There is a different way to look at this: Consider the price difference between your employer’s standard plan and the high deductible plan. Since you would be saving that money each month with lower premiums, you could put the difference into your HSA. Also, these funds go into your HSA pre-tax, so you are also saving there while reducing your tax burden.
Often an employer will incentivize the high deductible plan to encourage employees to choose it. Factor in the fact that your company may put the first $500 or $1,000 into your Health Savings Account. (Not all do, so make sure you know the specifics of your plan.)
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Prevention Still Key
Typically, a high deductible plan will still pay annual physicals, mammograms, colonoscopies and other preventive procedures at 100%. It may even cover things like diabetic testing supplies.
Consider your age and health when choosing your plan. If you are young, rarely go to the doctor and are single, then it’s practically a no brainer. If you only go for normal checkups and don’t have chronic health conditions, that’s also an easy decision. If you can save enough to meet the higher deductible – and most people can with some discipline – it’s an excellent way to save money over the long term no matter your age.
No Loss at Year End
You may be familiar with an FSA, or Flexible Spending Account, where you set aside money pre-tax to pay medical bills. Unlike an HSA, any unspent money in your FSA account at the end of the year is forfeited. It’s hard to guess what your medical expenses might be in the course of a year, but that’s not a problem with an HSA since unused monies carry over to the next year and beyond.
Triple Tax Advantage
HSAs have a triple tax advantage:
- They are put in pre-tax, thereby reducing your taxes.
- Your savings grow tax free.
- They are withdrawn tax free if used for qualified medical expenses.
This also applies to any contributions your employer makes to your account. An added bonus is that if you are 65 or older, you can withdraw your HSA funds without penalty.
One strategy is to fund your 401(k) enough (typically 6%) so that you get the full employer match. Then contribute the maximum allowed to your HSA (an amount that may change). Switch back to funding your 401(k) when you have enough in your HSA to meet your deductible. Any excess HSA funds can also be invested.
While the HSA is a medical 401(k), it has more tax advantages than a 401(k). You can use your HSA funds for any qualified medical expenses that are listed in IRS Publication 502. They can be used to pay your own, your spouse’s or your claimed dependents’ medical expenses even if they are not covered by your medical plan.
Keep Those Receipts
You will need to keep receipts and records for medical expenses paid out of your HSA. Most people keep a file for each year and store it with their tax records. You can also pay your medical bills directly from your HSA website, or you can pay it with the debit card you will receive when you open your account.
Smooth Sailing Ahead
According to Allard, the average couple who retires at age 65 will need $285,000 to cover their health care costs during retirement. It’s a hefty sum, but investing pre-tax dollars in an HSA and taking advantage of its multiple tax advantages can help you reach the goal of saving enough for your health care. That’s not even counting all the money you will save along the way!
Reviewed September 2021
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