I’ve been going through open enrollment season these past few months with my clients and have been amazed at how much money enrolling in an HSA can save! We grew up thinking the medical insurance plan with the lowest deductible was the best deal, but that is not always the case. I was shocked when I crunched the numbers.
What is an HSA?
An HSA is a Health Savings Account. It allows you to contribute funds for medical costs and get a tax deduction for your contribution. Any money unused rolls forward to the next year (unlike an FSA) and allows you to pull funds out for medical expenses tax-free at any time.
How do you know if you have this available?
Look through your benefits enrollment guide and see if you spot the special three-letter acronym HSA or Health Savings Account or if you are a business owner ask your insurance rep. You will need to enroll in a High Deductible Health Plan (HDHP) to be eligible for an HSA. Many employers are offering this today.
A few reasons why I love HSAs:
HUGE Savings on Health Insurance Premiums
How much you pay in premiums for a low deductible health plan can be significantly higher on an annual basis compared to an HDHP. Sometimes thousands of dollars!
The money you put toward an HSA is NEVER taxed, yet allows you a deduction
You get a tax deduction for the money you contribute to your HSA like you do with your Traditional 401(k). Additionally, if your contribution goes through payroll, it’s not taxed on FICA (social security & medicare), which is an extra 7.65% in taxes you just saved! Lastly, when you pull it out for medical expenses it’s tax-free - unlike a 401(k). No tax consequences. That means money (if used for IRS approved medical expenses) you get a tax deduction for... that can grow tax-free... AND will NEVER be taxed when you pull it out. That’s a triple tax whopper, folks!
There is a max contribution per year – For 2020, $3,550 if you’re single and $7,100 for couple or family
For context, let’s say you’re in the 24% tax bracket and contribute the maximum through payroll as a single individual then you’d calculate $3,550 X 31.65% (24% + 7.65% FICA) = $1,124 in tax deduction - meaning you just got $1,124 more towards any potential medical expenses. Also, you just lowered your taxable income so you may now be able to benefit from being in a lower tax bracket.
A Bonus Retirement Savings
If I haven’t convinced you yet, any unused HSA funds roll over from year to year, whereas an FSA (flexible spending account) funds vanish at the end of the year. If you are one of those lucky people that have very high income and need more ways to save for retirement because you have already maxed out your 401(k) and maybe an IRA too - don’t use your HSA for medical expenses. Here is why. If you leave the funds in the account, you can invest your unused HSA funds to use them for medical expenses during retirement (or anytime in the future). All those investment gains compounded will sweeten your retirement savings, especially considering medical costs average $280,0000 per couple in retirement (according to a Fidelity study). Yikes!
In summary, HSAs are a triple tax deduction
Tax Deduction for contribution
Invested funds grow tax-free
Tax-free withdrawals for medical expenses
Things to think about when getting started with an HSA:
High deductible health plans (HDHPs) have higher deductibles and higher max out of pocket amounts
At a minimum, contribute your annual deductible amount to your HSA
I highly recommend having an emergency savings in place in case you have an expensive health event occur (like an appendix!) Pro Tip: At a minimum, have the max out-of-pocket amount on the HDHP stashed away
One more thing to sweeten the deal – sometimes employers contribute $$$ to your HSA for you! I’ve seen $750 all the way up to $1,500, so make sure you look out for that... it’s free money!!
One of the many things I do for my clients is compare their medical plans, and most of the time, HSAs save the most money. If you want a partner by your side to help you make these types of financial decisions, schedule a free 30-minute call here.
