There are many benefits of contributing to a Health Savings Account (HSA) and at Young Adult Money, we are big supporters of contributing as much as you can, even maxing it out each year if you are in a position to do so.
HSAs have been around since 2003 and are intended to help Americans who are enrolled in high-deductible plans be able to afford their medical expenses.
Currently, we are on the brink of new health care reform and Senator Rand Paul recently released a proposal called the Obamacare Replacement Act.
Paul’s proposal reveals quite a few provisions, but in terms of HSA changes here is a summary of what is being proposed:
- A continued tax credit on increased contributions with no maximum contribution amount for health insurance holders to abide by (in other words, instead of having an annual cap, you would be able to contribute as much as you like to your HSA each year and receive a tax credit for contributions up to $5,000)
- Consumers would no longer need to be enrolled in a high-deductible health plan in order to qualify for an HSA
- People with Medicare, TRICARE, and VA benefits would also be eligible to obtain an HSA
- Acceptable uses of HSA funds would be expanded including the use of HSA funds to cover the cost of monthly insurance premiums (this currently isn’t allowed)
This replacement plan is currently just a bill, but it’s something to consider especially if you’re interested in making the most of your HSA.
If your existing health insurance plan qualifies you for an HSA, you should definitely get into the habit of contributing to it, and the younger you start the better.
When you’re young and relatively healthy, you may not think about getting sick or needing health insurance. It’s not uncommon for younger people to pay for insurance year after year and hardly ever utilize it.
However, even though you can’t visualize what your health will be like later down the line, you can take advantage of the present and start planning ahead.
Here are a few reasons why you should start contributing to your HSA as early as possible.
The Tax Benefits Are Too Good to Pass Up
I’ve mentioned the HSA triple tax benefits in a previous post, but I’ll go over it again briefly just as a reminder of how beneficial this tax-advantaged account is.
When you deposit money into your HSA, it’s not taxed nor is it taxed when you use it for health care expenses.
Qualified medical expenses for your HSA funds can be anything from doctor’s visits, copays, and treatments, to medicine at the pharmacy.
The money in your HSA account can also be invested in stocks and bonds and the investment gains you earn are not taxed as long as you use them for qualified medical expenses.
There are limits to how much you can contribute each year. This year, the maximum contribution amount is $3,400 for individuals and $6,750 for families. If you are 55 or older you can contribute $1,000 extra each year.
An HSA is the Absolute Best Retirement Account
Did you know you don’t have to use HSA funds for medical expenses?
An HSA is like a traditional IRA, but on steroids. Most people don’t realize that once you reach retirement age you are also able to withdraw the funds and be taxed as if the withdrawals were regular income, just like a traditional IRA.
Of course you can still – now or fifty years from now – use your HSA funds, tax-free, to pay for medical costs. Think of an HSA as an IRA with an added benefit, making it the absolute best retirement account on the market.
You Can Keep Your HSA Even if You Switch Jobs
If you know that you’re not at your forever job, that shouldn’t hold you back from contributing to your HSA. Even if you switch jobs or change careers later down the road, you will still have access to your HSA and you can use it like you normally would.
If your employer offers an HSA contribution match, you should definitely start contributing to it even if you don’t need the funds for medical expenses. To make the most of the tax advantages, you can invest some of the money in your HSA.
You could leave some of the money in the account to cover any surprise medical expenses, or you can opt to save it all for retirement and pay for your medical expenses on your own when you’re younger and have a stable income.
Your Medical Expenses Could Increase in Retirement, To the Tune of $350,000
I’m sure you want to retire some day. Do you ever think about what your expenses will be like in retirement? Contributing your 401(k) or an IRA is one thing, but you must also consider expected and unexpected medical expenses.
MarketWatch recently revealed some shocking data that hinted at how much money you’ll might need in retirement to cover medical expenses.
Their article references a report published by the Employee Benefit Research Institute (EBRI) that indicates:
- Currently, a 65-year-old man would need $72,000 in savings and a 65-year-old woman would need $93,000 if they each had a goal of having a 50% chance of having enough savings to cover health-related expenses in retirement.
- A couple with prescription drug expenses who wanted a 90% chance of having enough money saved for medical expenses by the age of 69 would need $349,000 as of 2016.
While these numbers are just estimates, they really put a lot into perspective. While there is no definite way to predict what health coverage costs and medical expenses will be when you retire, you can plan out how you will pay for them and prepare financially ahead of time.
Many retirees pay for their medical expenses with social security, pension, or other retirement income but the potential issue with that strategy is that all your income is lumped together and you must use it for all your other regular living expenses as well.
Plus, health care coverage and medical expenses tend to become more expensive as you get older which could make your finances tighter in retirement.
Time is On Your Side
You can give yourself a headstart and more financial security by beginning to contribute to your HSA when you’re young and investing some of your contributions.
Consider maxing your account out each year if you can afford to or work up to getting closer to contributing the maximum amount each year.
If you’re trying to catch up, you can make additional contributions as well once you reach a certain age.
What You Need to Know About Your HSA
Do you have an HSA? How do you plan on covering health care costs and medical expenses during retirement? What do you think of Rand Paul’s proposed HSA changes?
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I love the idea of opening HSAs up to people without high deductible health plans. My husband’s new employer does not offer high deductible plans–despite the fact that new grads are the biggest demographic of employees–and so we can’t keep contributing to our HSA which we had through his last employer’s insurance.
I think HSAs are a no-brainer, assuming you can put aside the cash, and not to mention the fact so many are impacted by high health care costs. As you said, the tax benefits are just too good to not take advantage of. We max ours out every year and plan on continuing to do so each year. If they’re able to get it done, I’m definitely in favor of expanding their availability.
I’ve been contributing the max to my HSA. HSA’s have awesome benefits as you mentioned above.
There is no reason not to have an HSA and invest for the long haul.
Thanks for sharing Chonce :)
Great article. HSA’s are so underused. After talking to so many colleagues who have access to an HSA, NOT ONE of them uses it. That’s right I have not met one another person who uses an HSA. Very strange because, like you said, for young and healthy people it provides such a huge benefit. Big tax savings now and in the future. And you can let it grow like an investment.
I know it’s just a bill, but being able to contribute more to an HSA sounds good to me!