We always hear about “healthy habits.” Brush your teeth twice a day, eat your veggies, drink lots of water, the list goes on and on. Like the routines that keep us healthy, there are best practices to keep our finances strong.
One example is a Health Saving Account (HSA), a great way to pay for today’s healthcare costs and save for tomorrow.
Health Saving Account (HSA) Basics
An HSA is a personal savings account for health expenses. HSAs are owned by you (not your employer). You can take your HSA from job to job or institution to institution, like a 401k or IRA.
HSAs offer triple tax advantages, including:
- tax-deductible contributions
- tax-free interest
- tax-free withdrawals for qualified medical expenses
They are not health insurance plans. HSAs must be paired with a qualified High Deductible Health Plan (HDHP) that have lower premiums and higher deductibles than traditional healthcare plans.
The IRS sets the contribution limits each year. In 2019, you can contribute up to $3,500 as an individual and $7,000 for families. Your employer can also contribute to your HSA. You can use an HSA to pay for qualified medical expenses.
There is no “use it or lose it” policy, so your money rolls over year to year.
Also, all HSA contributions are eligible for personal use (non-health-related expenses) after you turn 65.
If your employer doesn’t offer an HSA with your HDHP, you can sign up as an individual (or family) and contribute.
HSAs are an excellent way to offset a high deductible and put money aside for your healthcare expenses. While HSAs offer amazing benefits, you need a solid plan to get the most out of it.
Here are three “healthy habits” to practice to get the most from your HSA now and in the future.
Cover Anticipated Out-of-Pocket Expenses and a Portion of the Deductible
Many back away from HDHPs because they’re concerned about potential high out-of-pocket costs. You may ask, “What happens if I get really sick? What if we’re in a horrible accident? How will I pay that high deductible?”, which are all valid concerns.
The silver lining is that HDHPs typically provide good coverage above the deductible, and usually include an out-of-pocket maximum, for further protection. Also, most screenings and preventative care are 100% covered by insurance, including HDHPs.
While that may make the “catastrophic” events seem less daunting, what about everything else?
This is where having a well thought out healthcare budget comes into play. Once a year, sit down and think about what future healthcare expenses you’ll have. Does anyone wear glasses? Contacts? How about braces? Many of these items are qualified medical expenses and can be paid for using HSA funds. Has anyone had issues come up at preventative visits that may require additional care, such as elevated cholesterol levels or high blood sugar readings?
Once you’ve mapped out the coming year, consider contributing enough to cover your anticipated expenses plus the in-network deductible – or at least a good portion of it – to your HSA. You’ll feel more prepared for an unexpected ER visit or health issues that may pop up.
Capitalize on Employer Contributions
In 2018, 32% of HSA contributions came from employers. The average employer contribution was $658. Combining your money with your employers’ contributions will put a big dent in those anticipated out-of-pocket expenses we talked about earlier.
If your employer offers contributions, take full advantage! While rules and time tables differ, many employers make their entire contribution at the beginning of the year, or when you enroll in an eligible health plan and open an HSA.
Save and Invest For Future Qualified Medical Expenses and Retirement
Many HSAs allow you to set aside pre-tax dollars through payroll deductions. They may also be funded with after-tax dollars, and you can take a deduction on your personal taxes.
HSA contributions grow tax-free and can be withdrawn tax-free to pay for current and future qualified medical expenses, including those in retirement. Remember, if you don’t use your money each year, it remains in your account. You can take it with you when you switch employers or retire.
Let’s say you have an HDHP with an HSA. You figure you’ll spend about $2,000 on eligible healthcare expenses and decide to contribute $3,000 for future use to your HSA this year. If you’d like to increase your tax advantage, consider contributing the entire $5,000 to your HSA, and spend the $2,000 you planned for out-of-pocket expenses (tax-free) from your HSA. You can use these tax savings (as much as $500 in this example, depending on your personal situation) for additional retirement savings.
Many of us prioritize saving and investing for retirement. Consider contributing as much as you can afford, up to the maximum contribution limit, to your HSA each year to help reach your savings goals.
HDHPs, paired with HSAs, are becoming more and more popular. If you’re new to HSAs, take some time to establish these habits to watch your HSA help you now and down the road.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.