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What are Health Savings Accounts and How Should They Be Used?

Investment Planning

A Health Savings Account (HSA) gives you an efficient way to pay out-of-pocket health insurance expenses. The key benefit of an HSA is that it allows you to make annual tax deductible contributions into your  HSA account. Many people consider it to be one of the most efficient ways to save, regardless of whether you are saving for current and future medical expenses or your long-term financial future. 

Income and Deductibles 

More and more employers are now offering High Deductible Health Plans (HDHP). In exchange for having to pay a higher deductible amount, you will pay a lower premium.  Lower premium payments means higher take-home pay.  To offset the cost of the high deductibles, the Health Savings Account (HSA) was established so people enrolled in HDHP's would have an efficient way to save for future deductibles.  For example, if you made  $30,000 a year after taxes and had medical expenses that equaled your deductible of $6,000 deductible, then you would be giving up a full 20% of your income in medical expenses.

Reducing Your Taxable Income 

Making tax deductible contributions into your HSA reduces your taxes and increases the amount of taxable income you make a year. It helps you maximize your income while simultaneously safeguarding against emergency health situations. Individuals who contribute $2,000 to their HSA a year will be taxed as though they make $2,000 less than their standard income. The money you contribute to your HSA will roll over from year to year, which means the insured can grow their emergency funds over time. While these funds typically can't be used to pay for insurance premiums, they can be used to pay for co-pays, deductibles, and other eligible non-covered medical expenses. 

Maximum Restrictions 

The government has placed restrictions on how much a person can contribute to their HSA based on their age and marital status, and these restrictions change every year. For individuals, the current maximum is $3,400 and $6,850 for a family.1 Adults over the age of 55 are allowed to contribute an extra $1,000 or more. If you choose to open an HSA, you must make contributions in cash as opposed to other types of property, including stocks or bonds. Employers and family are allowed to contribute to an HSA on behalf of the individual. The contribution limits for employers generally change every year as well. 

How to Use It 

Some people use their HSA as a straight savings account while others may choose to invest the money in mutual funds or stocks. In fact, some financial experts view the HSA as a better financial move than investing in a typical retirement account. When it comes to an IRA, individuals are required to withdraw from the account once they reach the age of 70 1/2, but an HSA allows people to continue contributing to it tax-free with no such requirement. The income deposited is also not subject to the FICA tax that goes toward social security and Medicare, while an IRA would be subject to the additional tax. 

Withdrawals that you make for medical expenses regardless of your age are tax and penalty free. HSAs can also allowed to be used for non-medical expenses, though they will be taxed as income and will be subject to a tax penalty prior to the age of 65. However, after the age of 65, funds can be withdrawn from your HSA for non-medical expenses without penalty but it will be taxed as income.

HSAs are commonly offered by health insurance companies, so an you can sign up for the account simultaneously when signing up for a HDHP.  If you are not happy with your employer's HSA provider, it's possible to open a separate account at another financial institution that offers HSA's.   The choice of the right HSA often comes down to fees, investment choices, and convenience.

If you are healthy and do not see the doctor often, enrolling in your company's High Deductible Health Plan will save you money because it will lower your monthly premium.  (If you expect to see your doctor often, then a higher premium and lower deductible health plan might make more sense for you and your family). 

You can then enroll in an Health Savings Account and make tax deductible contributions.  If you do not need the money for medical expenses, the money can grow over time and you can potentially have a sizable investment in 10, 15, or 20 years.  The funds can then be used to fund future medical expenses tax-free.  If you are fortunate enough to be in good health then after the age of 65, the money in the HSA can further be used to help finance your retirement goals.

1 https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-lowers-2018-family-hsa-contribution-limit.aspx

  The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information only.