Alright, I admit it! I have a favorite savings crush (out of all the savings buckets). It’s my health savings account. Sorry, 401(k), I still love you so much, and you have so many great qualities. You are not as good as the HSA. So, as we enter open enrollment, I have to explain this often misunderstood love interest, I mean, the savings basket.
HSAs are accounts available for eligible high-deductible health plans. HDHPs are health insurance plans that require the insured to pay a higher deductible for health care, the first couple to several thousand health care expenses before the insurance pays. An HDHP typically enjoys a lower premium than a low-deductible plan. In my mind, pairing HDHPs with an HSA account allows the insured person to cash out the difference in premiums into a tax-advantaged HSA savings account to mitigate the risk of paying a relatively higher amount for their health care. poached.
Most people probably think of their HSAs as the flexible spending accounts that have been around longer and are associated with the well-known phrase “use it or lose it”. HSAs don’t use it or lose it and can accumulate over time. More importantly, unlike an FSA helping with co-payments or smaller expenses, HSAs are essential partners for larger finance charges that may come with higher maximum deductible or out-of-pocket costs. In other words, we probably need to save more in HSAs than in FSAs.
Let’s take someone with a $3,000 deductible but no savings. With a trip to the ER (with a subsequent MRI), the HDHP deductible hammer falls fast, hard, and mercilessly when those bills roll in. The last thing anyone needs in the midst of a health event is a sense of panic as they wonder where the money will come from to pay those bills.
At a minimum, HSAs are an important savings tool to defend against potentially devastating healthcare expenses.
But what many people don’t realize is that the HSA has tax attributes that make it more attractive as a retirement account.
Before getting into these attributes of the HSA, keep in mind that a health care choice should be made regardless of the benefit of the HSA. Assuming your numbers and expectations make an HDHP a reasonable choice, then, and only then, should you consider embarking on a lifelong love affair with that often-overlooked, fancy-yet-something bucket of savings. bit corny.
Unlike the FSA, the HSA savings tranche has all the makings of a lifetime committed relationship with its triple tax advantage. Yes, three of them. No income tax on initial contributions, no growth tax and no income tax on final withdrawals as long as they are used for eligible medical expenses.
Let’s say an HSA-eligible HDHP is your best (or only) choice for health care. You register for your HSA-eligible HDHP. You open the HSA. You have employee contributions deducted in the HSA, thus getting your tax deduction. You have the same route to ER and MRI. But you’re not using the HSA to pay for these expenses – opt for alternative savings.
Instead, the money you deduct from payroll in the HSA stays in place and accumulates in this account.
The government does not give a time limit on when you must take the HSA. If you use the HSA for eligible health care expenses, you pay no tax on that money, even in retirement. Even after investments have increased your savings.
Let’s say you’re 30 reading this and instead of opening that Roth like the good old days, you choose the HSA strategy. A maximum family contribution is $7,300 this year. Assuming the same contribution over 30 years and a 5% rate of return, you could accumulate more than half a million dollars for health care expenses in retirement that are NEVER TAXED. Not a dollar.
Oh, and fun fact, what is the biggest expense on average in retirement? Health care. Consider Medicare Part B and D premiums or Medicare Advantage plans. Or dental care. Or vision costs. Or prescriptions. I promise the list is long. Remember that HSAs can be used to pay for long-term care expenses. Friends, you don’t know the last time you priced long-term care insurance, but if you did, you might conclude that the premiums are unaffordable. HSA, anyone?
But wait! What if we “fixed” health care when we retire? Does this mean that we wasted our savings? Um, in this “worst case scenario” the money can be used for non-healthcare related items in retirement and would be taxed the same as an IRA. This is why many refer to HSAs as “stealth IRAs”.
What if you change your mind? You reach the age of 45 and have spent more than a decade maximizing federal savings limits in an HSA, paying for health care expenses from your bank account, not the HSA. No problem! If you have saved all healthcare receipts during this period (many HSAs allow you to scan and store receipts in your account), you can “cash” those receipts at any time, again free of charge. of tax.
Now configure this HSA. Unlike the 401(k), you are not captive to using the employer’s HSA option. I recommend you start with your employer and ask if their HSA allows investing. If so, probably stick with the employer’s HSA option. If your employer has an HSA that is essentially a savings account but the employer contributes to it, then by all means create and maintain that HSA! Then you can create a second HSA account yourself with companies such as Fidelity, HSA Bank or Optum Bank. You just need to make sure that your contribution to the outside HSA plus the employer contribution to the employer-based HSA do not exceed the federal limits.
In 2023, individuals can contribute up to $3,850 and families up to $7,750. There is even a catch-up contribution at age 50 of $1,000.
Many HSAs require you to maintain a cash position of $1,000 to $2,000, but as soon as you exceed this threshold, you can start investing. Fortunately, many HSAs have simple investment options, like my favorite target date retirement funds.
Finally, and most importantly, if you use this long-term HSA strategy, you should stash extra money in a savings account with your bank to cover the possibility of reaching your maximum deductible or payout. Otherwise, game over. You will be forced to use the HSA prematurely for healthcare expenses.
Now I know what you’re all thinking. It really is better than a 401(k). Much better taxation and even more flexibility to be able to open the account outside the employer if you wish. But WAIT, you have to remember that often retirement plans like 401(k), 403(b)s and 457(b)s have FREE MONEY via a savings match. If your retirement plan matches savings, the amount of free money you can capture with your own savings in your retirement plan will be a step ahead of an HSA.
This enrollment period, if you choose an HDHP healthcare plan, please also save in an HSA to pay for healthcare expenses. And if you have the means and the interest, consider not spending it on short-term health expenses; instead, invest those savings in a more committed, lifelong relationship with the HSA.
Many thanks to reader Claudia Utley for the suggestion that I dedicate a column to this juicy topic.
Sarah Catherine Gutierrez is the founder, partner and CEO of Aptus Financial in Little Rock. She is also the author of the book “But First, Save 10: The One Simple Money Move That Will Change Your Life”, published by Et Alia Press. Contact her at [email protected]