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August 25, 2018

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What is an HSA – Do I Need One?

August 16, 2017

We all know the cost of healthcare in America is rising. In fact, healthcare costs in the United States have been increasing at an alarming rate, substantially outpacing general inflation. Regardless of the source of information, the statistics are staggering. Data from eHealth show that from 2013 to 2017 the average health insurance premium for a family has more than doubled. On top of that, the average family deductible has increased by over 90%. Data from PwC show that general healthcare costs have been rising at 6.5% per year over the past five years, and that’s actually LESS than the rate it was rising for the five years prior to that.

 

How much will healthcare cost during retirement? Fidelity Investments reported recently that for a healthy couple aged 65 that retired this year, they should expect to spend $260,000 on healthcare over the remainder of their lives. This amount seems unfathomable, especially since Americans have less than $100,000, on average, saved for retirement. Still years away from retirement and think that the powers that be will reduce medical expenses before you hit 65? Don’t count on it. Check out the chart below to see how you could be affected, however old you may currently be.

 

 

With healthcare costs and housing prices rising around the country, and with earnings barely increasing, no wonder people are saving less than 4% of their pay. Too often people focus on obtaining material things, rather than protecting and enhancing their own lives. If only there was a way for people to get peace of mind from having health insurance, but also to be able to save for their future. Enter the HSA.

What is an HSA? HSA stands for Health Savings Account. A Health Savings Account is a tax-advantaged medical savings account, typically offered as an option through an employer’s menu of insurance plans.  This type of plan is relatively new, beginning in 2003. Since then the popularity has grown dramatically. According to the Kaiser Family Foundation, in 2003 only 2% of eligible workers who were covered by their employer were enrolled in an HSA. In 2016, this percentage had increased to about 19%.

 

To qualify, an individual must enroll, or be enrolled, in a high-deductible insurance plan. This means that the deductible must be at least $1,250 for an individual and $2,500 for a family. After the person chooses the eligible plan they then decide how much money to contribute to the plan throughout the year. Oftentimes an employer will chip in an amount as well, sometimes $250 or even $500 a year. The money an individual contributes is before federal taxes (and most state taxes) are taken out. Due to this the plan can save people quite a bit of money over time. During 2017, the maximum contribution to an HSA for an individual is $3,400 and $6,750 for a family. The maximum contribution includes any employer contribution into the account as well. In 2018, the maximum contribution rises slightly, up to $3,450 for an individual and $6,900 for a family. The great thing about the HSA is the tax benefit that comes with the account. As mentioned above, money that is used to fund the account is pre-tax, this means that an individual pays no federal or state taxes on this money. Unless the individual lives in California, Alabama, or New Jersey, in which case they will pay state taxes first. The benefits don’t stop there, however. When the money is withdrawn from the HSA to pay qualifying medical expenses there are no taxes taken out as well. The third tax-related benefit from a health savings account is that any earnings accumulated in the account are tax-free, so long as the money is used for qualifying expenses.

 

Many people nowadays are using health savings accounts as a type of retirement account. Because of the tax advantages, the HSA really is a type of retirement account on steroids. Any money taken out of the account that is not for eligible expenses will be penalized 20% in addition to paying taxes on the funds though.

 

Everyone will have health care costs in their life. With how quickly health care costs are rising in the United States people need to do all that they can do mitigate the expenses. Why not choose the HSA and at least save some money? Before making a quick decision it’s important to consider the pros and cons of a health savings account.

 

Advantages:

  • You decide how much money to contribute

  • Your employer may contribute money as well

  • You don’t pay taxes on the money going into the account

  • Any unused funds are rolled over each year

  • Money can be invested in stocks and mutual funds

  • Money can be withdrawn at age 65 for any purpose

 

Disadvantages:

  • HSA’s come with a high deductible

  • Due to the account being a savings account – it may be difficult to seek medical attention and have to draw down the funds

  • Money used for non-medical expenses are penalized and taxed

  • Annual contribution limits exist

  • Fees may exist on invested funds

 

Health Savings Accounts are perfect for individuals who are relatively healthy and don’t expect too many costs in the current year. For a young person who doesn’t get sick too often it may be a perfect plan. Even if a person does expect to have high expenses in the current year an HSA account could still be appropriate. Some people will say to only elect the HSA as it has tax benefits and can eventually be used for retirement. It isn’t quite so black and white though. One must weigh the costs of the other plans as well to determine which plan is truly in their favor. Check out this comparison calculator here to do some due diligence.

 

Know that you’re going to need surgery soon but it’s not imminent? Elect the HSA for two years and max out the contributions. Then, when your plan’s open enrollment comes around switch plans and get into the plan that has the lowest deductible and out-of-pocket costs. This will allow you to use the pre-tax savings from the HSA to contribute to the out-of-pocket on the new plan. This strategy may be a little aggressive, but it does bring up an important point. If you do switch from an HSA into a traditional health care plan you can still use your health savings account funds for the qualifying medical expenses. All-in-all the HSA is a powerful tool for both medical expenses and retirement. Do your research on all plans available to you and try to think of different scenarios that could happen. By doing this you’ll be sure to choose the right plan for you.

 

 

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