Advantages of health savings accounts and why I love them

There are some great advantages to health savings accounts. Do you have access to a Health Savings Account (HSA)? If you are not sure, look into it! HSAs are like a medical 401k plan but way better.

In short, here are the top three advantages of health savings accounts:

1. Pay no tax on the contributions
2. Invest the funds and pay no taxes on the growth
3. Pay no tax on the withdrawals (when you pay for medical expenses or withdraw at the 65 years or older for any reason)

Health Savings Account vs. Flexible Spending Account

HSAs are different from Flexible Spending Accounts (FSA). As open enrollment season approaches, it’s time to decide if changes to your medical benefits are possible. I’ll share why I think health savings accounts can be a great option for some. 

The differences between these two accounts are in the names themselves. One is a medical savings account and the other is a spending account. Contributions to either health care account are deducted from your paycheck on a pretax basis.

Contributions to flexible spending accounts are to be used. There is no annual roll over. If you don’t use the money in that account for qualified medical expenses, you will lose it. The FSA is a “spending” account after all. Use it or lose it. Unlike contributions to an HSA, money in an FSA does not grow and can’t be invested.

What I love about the Health Savings Account (HSA) is that in addition to the contributions to the account being on a pretax basis, any unused funds roll over from year to year. There are no yearly spending requirements. This is one of the reasons why I think HSAs are great.

In order to contribute to an HSA, you must be enrolled in a high deductible plan.

What is a High Deductible Health Plan?

A health insurance deductible is the amount of money you have to pay toward your health care costs before your health insurance covers the rest. High deductible health plans have high deductibles or higher out-of-pocket costs. HDHPs must set a minimum deductible as well as a maximum for out-of-pocket costs, to see the current limits check out HealthCare.gov

For example, if you have yearly health care costs of $600 and your deductible is $2,000 you will have to pay the $600 toward the costs of healthcare out of pocket.  In fact, you would be responsible to pay for the first $2,000 of health care before insurance kicks in.

Do not choose a high deductible plan if you cannot afford to pay the deductible. Even if you never go to the doctor, just imagine what a $2,000 hospital bill would do if you couldn’t afford it. Check with your health insurance provider to determine the amount of the deductible for your HDHP.

How much can you contribute to an HSA?

HSAs are accounts available to those who are enrolled in an HDHP. You can contribute to the HSA in order to hedge any health care costs you may encounter in the year.

Annual HSA Contribution Limits

What are the tax benefits of health savings accounts

HSAs have great advantages when it comes to taxes. An HSA is a way to reduce your taxable income and build up your savings. HSA have triple tax benefits. HSA contributions are tax-free when deposited.  The funds grow tax-free. Contributions and growth of the account remain tax-free when used for eligible medical expenses. An HSA account is like a medical IRA or medical 401k plan.

Which is better, an HSA or FSA?

The HSA is the hands-down winner in a matchup between an HSA and the FSA.  Not all employees will have access to both or either accounts.  Both FSAs and HSAs allow you to contribute your pre-tax dollars to pay for out-of-pocket medical expenses. Despite that, the HSA pulls ahead with a few other benefits.

Here are some factors to consider before you enroll in a HDHP. There’s a 20% penalty for using HSA or FSA funds for non-qualified expenses. Generally, you cannot have both a Health Savings Account and a health care flexible spending account.

A misnomer about HDHP, is that you have to pay all medical costs out-of-pocket. Read the fine print for your plan! They usually cover annual health exams including prenatal care. In fact, in 2019 the IRS increased the list of preventative care HSA participates would receive.

My company began offering high deductible health insurance plans during the “open season” of 2017. What I love about HSAs is that the money that is deducted from my paycheck and contributed to the account can be invested! One of the investment fund options available to me is Vanguard’s, very popular, VTSAX (Vanguard Total Stock Market Index Fund.) Sweet! This is another reason why HSAs are great.

I love health savings accounts

HSA contributions are made with payroll deductions using pre-tax dollars that can be invested. You can withdraw money from the account tax-free if you use the money to pay for medical expenses. The money grows in the investment account tax-free too. Triple Tax Advantages! This is my number one reason why I think HSAs are so great!

The IRS rewards those who save.  One of the ways this occurs is by reducing your taxable income by the amount of contributions you make to certain tax-advantaged accounts.  Health Savings Accounts are a type of tax-advantaged account.

For example, when you contribute $2,000 to your HSA, those $2,000 are deducted from the amount of your taxable income. In most cases, this is done automatically once you enroll in an HSA and set up the contributions.

HSAs are portable and are not affected when you change employers. The account stays with you.

What we like most:

1. We don’t use the health savings account to pay for medical costs – we are incredibly fortunate to have very little health care expenses. This year when I saw a specialist, I was surprised that I received the negotiated rate between the provider and the health insurance company. Two visits later and my medical bill was less than $300.
2. Our HSA requires that $2,000 need to remain in “cash” in the account but we invest the rest in index funds.
3. We plan on continuing to contribute to the HSA and letting those funds grow until we need it to cover medical expenses that we can’t cover out-of-pocket. 
4. Any contributions made to the health savings account can be withdrawn at ANY time if you have the receipt. Save those paid medical bills!
5. Any money that is in the HSA can be used for ANY purpose once you turn 65 years old! Once you hit 65, the contributions and growth can be withdrawn and used as for any purpose. This means that the contributions went in tax-free and if withdrawn at 65 or older, can be withdrawn tax-free! This includes contributions and growth. Essentially the HSA combines the best of the 401k and the best of the ROTH IRA.

Takeaways

There’s no doubt that there are great advantages to health savings accounts, particularly the tax benefits. However, it’s not always about taxes or saving money. The lower premium cost for health savings accounts are great but they have higher out-of-pocket costs. If you have flexibility in your monthly budget or have a medical emergency fund this could be a great option for you.

We have had a high deductible plan for several years and it’s worked out great for us. Be sure to ask you your employer about all of the health care options available to you. Having an HSA can be a great addition to your investing strategy. 

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