Have you ever started a new job, signed a BUNCH of paper work (including health insurance documents), and then left for the day not really knowing what the heck happened? Or does the word “insurance” make you want to hide under your down comforter and binge watch Netflix on your phone all day? Well you’re in good company. There are SO MANY different health insurance options out there. Even if you are lucky enough to work somewhere that the options of health insurance are more narrow for you (because its already a benefit of where you work) it STILL seems like there are a million different decisions to make. And one of those decisions is whether to enroll in an HSA. You can save a ton of money with an HSA. Here’s how.
First things first, what is an HSA? HSA is short for “health savings account.” It’s a great way to save money for health expenses and reduce your tax bill. Basically, you allot a set amount of your pre-taxed earnings each month to your HSA. If your HSA is set up through your employer, you’ll likely have that money deposited directly into your account at the same time as you are paid. Then, when you need to make a qualifying health related purchase, you make that purchase using a specially designated debit card for your HSA. Qualifying purchases usually include things like copays for doctor visits, pharmacy copays, but if you play your cards right, you can even pay for things such as a gym membership (you’ll need a doctors note saying you need it. But hey, we ALL need it!). Here are the three biggest ways that you’ll save a ton of money with an HSA.
HSA’S HAVE BIG TAX BENEFITS
HSA’s have three huge tax benefits, that I like to think of as a triple threat. First, all of your contributions to your HSA go into your account before your income is taxed. That means that you will be taxed as if you earned a lower income than you actually earned, which could potentially put you in a lower tax income bracket. This is a huge deal for everyone, and especially for high income earners who are taxed +30% but who also have high debt they are trying to pay off (cough cough like us).
Second, you don’t pay any taxes on the account’s growth. Many HSA’s are set up to earn certain interest rates and many can be invested (more on this later). When the balance on your account grows, even though you are now making more money, you won’t be taxed on it, ever. That means that if you save money in a HSA many years (like a retirement account) and it yields significant growth… you still won’t be taxed. Yay!
And third, you don’t pay taxes when you make withdrawals for eligible health care expenses. In other words, when you make an eligible health care expense (such as purchasing a prescription from a pharmacy) you won’t be taxed on the amount that you are deducting, unlike a retirement account where you are taxed when you withdraw from it.
In short, a health savings account is a great way to save some money on taxes.
YOU DON’T LOSE IT IF YOU DON’T USE IT
If you don’t spend all of the money in your health savings account each year, it does NOT disappear. This is unlike the related Flexible Spending Account, where if you don’t spend the money, you lose it at the end of each year. The money in your HSA is yours forever. This is good for two main reasons. First, because you can save up for big health care expenses (like the birth of a child) and second, depending on which company you have your account with, you can invest the money in your account in mutual funds (we’ll get into that next). Think of your HSA as a secret bank account that Uncle Sam won’t pester you about.
HSA’S HAVE BIG INVESTMENT BENEFITS
One of the most surprising/best benefits of an HSA is that you can invest it to make even more money. You can decide how much you want to contribute to your HSA, but you can’t exceed the maximum allowable limit of $3450 (individual) or $6900 (family). If you are over the age of 55, you can contribute $1000 more per year as an individual or family. Some of the companies who service HSA’s allow you to invest money from your HSA into mutual funds, for example, if your HSA is in the trust of JP Morgan, once the balance of your HSA reaches a certain threshold (usually $2k) it will allow you to invest in the mutual funds it operates. This has some serious retirement implications– if you’re putting in the maximum amount, not withdrawing anything, and earning 5% a year, you could be looking at +$600k in 40 years, tax free! Not too shabby. It is still better to contribute to a retirement account if your employer matches the balance, but definitely a supplemental retirement option to consider, if you don’t have a lot of health care expenses.
We have been using an HSA for the past year and LOVE IT. And while I wish it was more of a savings account… we’ve spent a LOT of time in urgent care and the doctor’s office the last 6 months. We’ve saved a ton of money with our HSA. Do you have a health savings account? What do you like/dislike about it? I’d love to hear from you!