I used to have a common guy problem (no not that one!) – it’s the one where I wouldn’t go to the doctor because “things will just work themselves out.” Bad idea in general and, as I’ve grown a little older, I at least now do the annual checkup (something I never used to do). Although never going was a bad idea, it did help me get ahead on something. About 6 years ago, my company offered something called a Health Savings Account or, it’s more well-known acronym, the HSA. If your company offers an HSA plan and you want to take advantage of it, the big requirement is that you have to change to a high-deductible health plan. You can then contribute money into your Health Savings Account. The money that you contribute to your HSA is deducted right out of your paycheck using pre-tax dollars just like contributions to your 401(k).
Because you have a high-deductible plan, the insurance costs taken out of your check are usually a pretty good chunk lower. That allows you to contribute the remainder you would have spent on a regular medical plan into your HSA. Usually you can contribute whatever you want to your HSA up to the federal limits for the year (for 2016 this is $3,350 for individuals and $6,750 for families).
So what are some of the benefits of a Health Savings Account?
Well for starters, any funds you have in this account can be used for medical costs. Many of the HSA banks issue you a debit card (or checks) for your account and you can then pay for your deductibles, co-pays, medical bills, prescriptions, or any other medical costs from it. You can also pay for medical expenses with cash and then reimburse yourself with your HSA afterward (save your receipts!!). So it’s basically like a savings account to use for medical expenses.
But wait – there’s more…
This money sticks with you. In other words, money you contribute to the plan that you have leftover stays with you year after year. It even stays with you if you leave the company you work for.
Also, similar to a retirement account, when you reach 65 years old, you can pull the money out to use penalty-free for whatever you want – it no longer needs to be used only for medical expenses. You will pay taxes on it (similar to a 401(k) or 403(b) plan), but there won’t be any penalties.
Depending on how the plan is structured, you may be able to make investments in it, just like you can with your 401(k) or 403(b). In our plan, you can invest any portion over your deductible. In other words, I can invest anything in it over the $6,750 number… that gives me a little over $4,000 to “play with” as of right now.
Your account also gets passed onto a beneficiary upon death… the death part – not so good, but it’s good that your money lives on!
So how did not going to the doctor help you get ahead?
As I mentioned, when you go to an HSA plan, you must also go to a high-deductible medical plan. Because of this, you now need to pay for that big old fat deductible for medical costs incurred. The deductible is generally for the year and then starts over. Once you’ve built up the money in your HSA, that deductible isn’t really that big of a deal. However, that first year can be a tough one. You likely don’t have enough funds in your HSA to cover it, so you will likely need to pay for the deductible out of your own pocket. Lucky for me, I didn’t go to the doctor for the first couple of years (and somehow my wife didn’t), so we had a chance to build up our account. That’s how not going to the doctor actually helped me out.
Over time, if you’re not a person or family who goes to the doctor on every little thing, your balance starts to build up. As of this writing, we’ve gotten our account up to over $11,000. As part of my goals for this year, I’ve doubled my contribution to $150 every other week, so this should start to accelerate a little faster. I’m hoping to up that again sometime later this year if I can.
On the flip side, we got screwed on our HSA years ago when my wife was pregnant. We knew that the HSA would get drained with her medical costs when she had the baby, so we tried to switch her back to my wife’s regular plan on her insurance. Unfortunately, our daughter was born 6 days before the plan’s open enrollment change took effect. That sucks – we definitely got hit hard that year! I’m sure we hit the deductible for the year because of one lousy week, but that’s life and our daughter was definitely worth the cost! 🙂
Wait, I have a Flexible Spending Account (FSA) – isn’t that the same thing?
That’s a big old negative. Some companies offer a different program called a Flexible Spending Account (FSA). FSA plans have some non-appealing limitations. Your funds don’t carryover each year (spend it or lose it!). That also means that it’s not a retirement account.
Also most FSA plans don’t allow investing and your contribution limits for the year tend to be less than HSA plans.
Didn’t you say that these HSA plans might be the best bang for your buck?
I did and here’s why they’re so cool. An HSA plan is the only plan I know of where the tax man doesn’t get a piece of the action if you use it for medical costs. Remember that you funding the account with pre-tax dollars to start with. Well, guess what? When you pay for your medical costs with them, you don’t pay taxes on the money there either. I can’t think of another plan where you get that awesome benefit. So, similar to your 401(k) or 403(b) plan, this can help bring down your taxable income for the year. The difference though is that on your 401(k) or 403(b), you get taxed when you take it out.
If you think about it, chances are that as you continue to grow older your medical costs will go up, so using this plan for your medical costs is 100% tax-free! That’s a benefit that’s really hard to beat!
So are HSA plans the best bang for your buck? Well, maybe I exaggerated just a little but those points I mentioned are fantastic opportunities to help build wealth. That said, having a 401(k) plan with an employer match has the obvious advantage of free money. If you can afford it, try to do both – they’re both good for the long haul and should help you on the road to financial independence.
Do you have an HSA at your job and do you take advantage of it?
Thanks for reading!!
14 thoughts on “Are HSA Plans the Best Bang for Your Buck?”
I had an HSA for years. Being self employed I had the option of picking my insurance plan, so I chose an HSA-eligible plan. We have tracked our expenses each year, but have not taken funds out of the HSA yet. They are invested in low-cost Vanguard ETF’s that hope will grow over the years. Eventually we’ll reimburse ourselves as a form of tax-free cash to use for living expenses now that I’ve retired from full-time work. Being “only” 49, I hope to let the HSA grow to a lot higher balance before needing to reimburse ourselves for old expenses!
HSA’s are a great option to consider.
That’s a cool plan, John! I also like the idea of using low-cost EFTs – I’ll have to see if that’s one of my options for my own HSA.
I may be wrong, but I believe – since you own the funds in the HSA – that you can do trustee-to-trustee transfer of some/all of your HSA funds and move them to your own choice of trustee – even if you’re still employed by the same company. Assuming that’s right, if your HSA doesn’t have low-cost investing options, you may be able to move to another one. I’m with HSA Bank for my HSA which allows me to invest via TD Ameritrade. TD Ameritrade offers many Vanguard ETF’s with no commission!
Just a thought…..
Wow, that’s interesting… I already have my Roth IRA with TD Ameritrade, so maybe I’ll dig into seeing if I’m able to do that.
The pre-tax nature and penalty-free withdrawal after 65 are definitely appealing. It’s also nice that the money can be invested. However I’m not sure about having to let $6750 sit uninvested though. If there’s plan that allows you to invest the entire balance I’ll be more in love with it.
While having some money sit does suck, keep in mind that with standard medical plans, there’s zero money saved… it all just goes out the window on your check. At least this way, you can build up past that number and invest everything above it. If you have $50,000 in it, that number starts to seem like a lot less that’s just sitting.
I love the HSA for all the reasons you mentioned here. The tax savings are an incredible incentive to opt into the high deductible option.
One note, I didn’t see you mention that you can be reimbursed for your medical expenses at any time, including years later. Some folks (like myself) plan on leaving as much as I can in my HSA so I can let it grow with the market. I team this approach up with saving my medical expense receipts. The obvious disadvantage is I pay more today for medical expenses, but this route leaves me with a source of tax-free income during my early retirement years (and before my IRA Conversion Ladder takes off).
Thanks for putting this post together!
That’s an excellent point about reimbursement. The HR manager at my office is actually pretty cool with this. If we are planning on paying medical bills, instead of doing it the way you mentioned, she will let us make a large one-off contribution to our HSA for our paycheck. That way we can still pay the bills without touching the existing principal, but still get the tax benefits. Probably a pretty unique situation, but a good perk of my job.
I love my HSA, I will do my best to utilize it wisely down the road in retirement. Triple tax advantage can’t beat that!
You got that right! As a millennial, you have the great opportunity of time to really build this account up. Good luck to you!
When my company first switched over to an HSA, I wasn’t very excited. But after I read up on the advantages, I loved it! I’ve been maxing out my contributions every year, not touching it for medical expenses, and have been investing in Vangaurd funds (over $1,000 that I leave for Zoë sea if I need them). My balance is low over $66,000. My goal is to build it up to $125,000 before I retire and then use it for medical expenses in retirement. One thing to note, once you reach 55, you get a catch up provision, so I can contribute $8,100 this year. Love my HSA!!
Wow!! Nice job!! That account is going to be a great asset for you in your retirement for sure. And that’s a great chunk of money you’re able to put in at 55. Awesome work, John!
Hello Jim! I have read that medical expenses are one of the major reasons people file bankruptcy so that is initially what lead me to start my HSA contributions. I like to think of it as an addition to my emergency fund but with great benefits! I am hoping to continue to contribute as close to the max as we can each year and let it grow, but it’s nice to know if we did have a major medical expense we would have the funds to cover it!
Absolutely – for healthy people, this can be an opportunity to stash cash in a fantastic account!