You may or may not have heard of Health Savings Accounts (HSA’s). Many employers and state providers offer them. For you to qualify, you have to select what’s called a High Deductible Health Plan or HDHP.
An HSA can possibly be an amazing way not only to save for medical expenses but you can also take the money out in retirement.
They are what’s called “triple tax-advantaged” in practice.
What that means is that 1) The money you put it goes in on a pre-tax basis, so you lower your tax bill for the current year. 2) Money you put in there may be used at any time for medical expenses without paying any tax or penalties. 3) Since you can actually start investing money you put in your HSA, those investments will potentially grow, and if you use the money for medical expenses now or in retirement, you will get to use the money tax-free.
While HSA’s can be great, the medical insurance plans they are attached to do have higher deductibles so if you don’t have a good emergency fund saved up, they are not the best idea since you will pay taxes and potentially penalties if don’t use the funds for medical expenses.
The deductibles are something you need to be ready for if you choose an HSA. For a single person in 2016, the minimum deductible to qualify your insurance plan as ‘high-deductible’ is $1,300 for a single person and $2,600 for a family. The maximum out of pocket is $6,550 for a single person and $13,100 for a family. The maximum you can put into an HSA tax-deferred is $3,350 for a single person and $6,750 for a family. (These are $1,000 higher if you’re 55+)
That means it could take you up to 2 years to put enough in an HSA to be able to cover the maximum out of pocket costs.
But, if you have your full emergency fund of 3-6 months of expenses built up, they are a great way to save not only on your monthly medical insurance costs, but also your tax bill.
Another account that’s popular for health savings are Flexible Spending Accounts (FSA’s). They can be good as well.
The big difference is that they are use it or lose it besides a $500 carryover. Typical limits for FSA’s are $2500 though expected to increase to $2600 potentially in 2017. So, what that means is, you can put up to that amount, tax deferred (you don’t pay taxes) each year.
Here’s where you have to be careful. If you don’t use the money, you lose it. Yes, you could literally forfeit $2000 if you’re not careful.
While for some companies, this is all they have, if you have savings to cover deductibles, go with an HSA before an FSA.
In general, these accounts are meant to put more burden on the insured financially instead of the insurance company. That’s why you have higher deductibles.
So if you get sick either a lot or very little, and have good savings (at least 3 months expenses and up to the deductible for the HSA/FSA) the high-deductible health plans can be pretty good and will save you money monthly.
If you don’t have a lot of savings, go with the lower deductible plans, if offered, and pay a higher monthly payment.
*This post is an excerpt from my new book on personal finance for people in their 20's, 30's and 40's coming out soon. If you would like to be notified of the launch, subscribe below and we'll email you!