You’ve likely heard that having an HSA can help you to lower the cost of your medical care – but studies have shown that only 17% of people enrolled in group health plans are using their HSA. And of the people who are using their HSA, only a few of them are contributing the maximum amount each year. This gap is largely because not everyone knows about HSAs or their many benefits. As is usually the case with personal finance, the more you know, the better decisions you’re able to make. So let’s take a minute to break down what, exactly, an HSA is and how you can use it to your benefit.
An HSA, or Health Savings Account, is attached to High Deductible Health Plan insurance coverage (HDHP). In order to open an HSA, you have to be enrolled in HDHP insurance. The HSA is intended to offset the high medical costs often associated with HDHP insurance coverage – which has a high deductible (hence the name), and puts group members in a position where they have to pay out of pocket for most non-essential care services until their deductible is met.
Your HSA is funded with pre-tax money, and it grows tax free.. More importantly, it rolls over from year to year, so you’re continually growing your funds without feeling pressured to use them immediately. Keep in mind that your HSA funds can only be used for qualifying medical expenses. This can include everything from doctor copays to hospital bills to a box of bandaids from your local grocery store. Putting money aside into an HSA helps to lower your taxable income while still preparing for a medical emergency, or even just offsetting smaller medical expenses – like taking your kids to the doctor.
Because contributions to your HSA lower your taxable income, it’s a good idea to contribute as much as you can. The current contribution limits are:
Many people use their HSA to save for larger medical procedures – like having a baby, or intensive surgery. Others use it to put money aside for rising medical costs during retirement. Knowing what you can contribute is the first step to understanding what the best way to use your HSA might be. Some employers even offer a program where they assist in contributing to your HSA – which increases the total amount you’re able to save for future medical costs.
HSAs and HDHP insurance plans were originally created in hopes that if an insured individual was forced to spend their own funds on health related costs, they’d spend wisely. While this logic might work for some, others have figured out how to work the system to their advantage and use their HSA for several different financial planning purposes:
As you create a plan for your HSA funds, it’s important to remember that you own them, not your employer. Even if you set up the account through your employer originally, you get to take that account with you wherever you choose to work in the future (or into your retirement). That’s why researching your HSA provider to ensure you’re getting the benefits you want is critical. It’s also important to remember that you won your HSA – and get to decide what happens to the funds in the account.
This means you can decide whether you want your HSA funds to remain all-cash, or if you want to invest all or a portion of them. Additionally, you get to decide who the beneficiary is on your account, and if you want to proceed with a one-time roll over or transfer of funds from your IRA to your HSA.
I like to view an HSA as an added layer of protection for clients. Putting money aside in an HSA has clear tax benefits, and it’s handy to have when you hit retirement. More than that, though, clients who contribute to an HSA because they’re enrolled in a high-deductible insurance plan are protecting themselves against the unknown. As a financial planner, I talk a lot about building an emergency savings and thinking about your future.
This is especially true for entrepreneurs, or young families who are working to pay down debt, grow their retirement savings, and reach other financial goals – like purchasing a home. Your HSA is an added layer of insulation against the inevitable. Eventually, something will go wrong with your health (or a family member’s health). In our case it has helped with medical bills for the kids and recently my cardiologist appointments (dont worry everything is fine).
It’s not uncommon for people to go into massive amounts of debt trying to pay off thousands of dollars of hospital bills after a car accident, or when their kid breaks their arm, or because they’ve been hit particularly hard by flu season. Don’t let the unexpected force you to sideline your big-picture financial goals. Regularly contributing to an HSA, or finding another way to set money aside for medical expenses, can help keep you on track.