Kim Parr is an optometrist by day and blogger by night. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.
Health care has been in the news quite a bit over the past year.
With all the big changes happening with the Affordable Care Act in the US, you’d have to be hiding under a rock not to know that almost everyone is now required to have some sort of insurance coverage. For many, the costs have risen dramatically.
What if I told you there was a way to save thousands, possibly hundreds of thousands of dollars, on health care over the next 25 years? With a fully funded health savings account, that’s a definite possibility.
What is An HSA Account and How Do I Get One?
A health savings account or HSA is an account you set up to cover deductibles and medical expenses in conjunction with a high deductible health plan. In order to have an HSA you only need to meet the following criteria:
- Enroll in a qualified high deductible health plan. Minimum deductible amounts for 2014 are $1250 for singles and $2500 for families. Just because your plan has a high deductible doesn’t mean it is HSA compliant. Check with your insurance company if you aren’t sure. You also can’t be on Medicare or covered on another insurance policy.
- Set up a separate HSA account through a custodial company like a bank or brokerage. Once you have the insurance plan, it’s your job to set up a separate HSA fund and contribute. Sometimes your insurance company already has a trustee or you may need to use a local or online institution. You can get a debit card or checks to use just like with a regular bank account.
Tax Benefits of An HSA
HSA accounts have triple tax benefits:
- Contributions are Pre-Tax or Tax Deductible. For 2014, the contribution limit for individuals is $3300 per year and families can contribute $6550, with a $1000 catch up contribution if you are over age 55. If your employers offers an HSA, money can be contributed pre-tax. If not, the full amount you contribute is tax deductible, regardless of whether you itemize or not. If you are in the 25% tax bracket and max out your family contribution, that’s over $1600 of federal tax savings per year!
- Money Grows Tax Free. You can choose to invest your HSA money in anything from a simple savings account on up to stock funds. Regardless, any interest you earn grows tax free. An HSA is not like a flexible spending plan where you must “use it or lose it.” You never lose your HSA money and it stays with you if you change jobs.
- Withdrawals Are Not Taxed if Used for Medical Expenses. You can withdraw HSA money, tax free, at any time to pay for qualified medical expenses. HSA dollars can be used to pay for medical expenses until you reach your deductible plus a number of other things like glasses, dental visits, braces, LASIK surgery, long term care premiums, or copays. You can also use HSA money for your spouse or dependents even if they are not enrolled on your plan.
Check IRS.gov for a full list of eligible expenses. Again, using an HSA account for medical expenses is like getting at least a 25% discount if you are in that tax bracket.
How a Health Savings Account Can Save Your Retirement
Many people will only use their HSA account to fund current medical expenses, meaning that whenever a medical expense pops up, money is put into the HSA only to be withdrawn immediately to pay a bill. There is certainly nothing wrong with this. You’ll be getting your 25% discount.
However, to really make some headway and earn thousands of dollars with your HSA, you have to contribute like crazy and leave the money alone for a long time. I hear the argument.
“My health insurance is sooo expensive and I have a high deductible. I’m barely able to put anything into my HSA and then I have to pull it out to pay bills.”
It is hard to pay current bills, fund a retirement account and max out an HSA, but think about the huge concern most retirees have about their golden years. One chronic illness or nursing home stay has the potential to wipe out all you’ve saved throughout your career. The thought of not having to worry is enough motivation for me to make sure my HSA gets funded.
How My HSA is Going To Make Health Care in Retirement a Non-Issue
This isn’t a post about extra income, but if you read financial blogs, you know there are thousands of ways (see 15 of them) to make extra money. If you make it a priority to save enough in an emergency fund to meet your deductible AND fully fund your HSA annually, it’s really fun to look at the numbers.
For example, I am 40 years old. If I started a family HSA this year and fully funded it annually until I was 65 using low cost, moderate risk Vanguard funds as my investment vehicle, how much would I have?
According to this future value calculator and using very conservative numbers:
I contributed $163,750, assuming the contribution limit stays at $6550.
My tax savings on contributions was $40,937.50, assuming a 25% tax bracket.
My return on investment,assuming 5%, was $164,493.12.
My tax savings on earnings was $41,123.28.
My future value of the HSA was $328,243.12!
Plug in your numbers and see what maximizing HSA limits can do for you. Even if I need to live in a nursing home, I have a good shot of having enough tax free money to cover retirement health care expenses.
If I don’t have expensive medical bills, I can start using HSA money like a regular IRA at age 65. Withdrawals can be used for anything after that age without penalty.If it isn’t medical, though, it will be subject to regular income taxes.
However, I can save my medical receipts for the next 25 years and reimburse myself tax free for any qualified expenses. There is currently no expiration date on paying yourself back with HSA funds. Potentially, I’ll never have to pay any tax on all that money!
Have you started an HSA account? Why not? Please comment below.
IRA contributions and tax filing deadline is just around the corner on April 15, 2014… have you funded & filed yet?
For more information on health savings accounts at wikipedia.