If your health insurance has a Health Savings Account – otherwise known as an HSA – count yourself lucky. There are many reasons to contribute to an HSA, including tax benefits and the fact that it can double as a retirement account.
This will be the third year that I contribute the maximum allowable amount to my HSA and I have no plans of stopping in the future.
I was discussing the benefits of an HSA with a friend recently and he’s gone from contributing nothing to having regular deductions from his paycheck. Why? In large part because in our discussion we talked about the many reasons to contribute to an HSA, which I’m about to share with you.
1) Lower your taxable income
Every dollar you put into your HSA is considered pre-tax. I repeat: every dollar you put into your HSA is considered pre-tax. This is a huge advantage of the HSA and this fact alone makes contributing to and HSA attractive. The maximum allowed contribution for 2014 is $3,300 for an individual and $6,550 for a family. This is net of your personal contributions and your employer contributions.
2) Employer Match
Some employers will match your HSA contributions dollar-for-dollar up to a certain amount. My employer matches the first $500 I contribute. My wife is on my health insurance plan so we actually get $1,000 matched each year. If your employer matches contributions and you aren’t contributing you are missing out on ‘free’ money.
3) Invest the balance
Are you skeptical of having money sitting in a bank account when it could be exposed to the market? Think again: you can typically invest the money you have sitting in your HSA. This allows your savings to work for you.
4) Secondary retirement account
Pre-tax dollars, ability to invest in the market…this all sounds familiar. That’s right, you can treat your HSA as if it’s a retirement account. After age 65 you can withdraw funds from an HSA and the withdrawals are treated as regular taxable income. This is in effect the same way regular IRA withdrawals are treated.
5) Keep it when you switch employers
If you have insurance through your employer you will not lose your HSA when you switch to a different employer. You will still have access to your HSA and you will be able to continue to use it the same as you have in the past.
6) No “use it or lose it”
Many people have flexible spending accounts (FSA) through their employers. These accounts give you a certain amount of money to use on qualified medical expenses within a given year. The drawback of an FSA is that it has a “use it or lose it” policy – if you don’t use the money by the end of the year, it’s gone. HSAs are different because you never lose the money by not using it. It will continue to roll-over year-after-year.
7) Create a medical emergency fund
Many health insurance plans these days are high-deductible. While this is not necessarily a bad thing, it can leave individuals with very large medical bills. By contributing regularly to your HSA you create a medical emergency fund where the money is available if you ever need it. Medical issues can happen unexpectedly and there are countless medical conditions that are not preventable. Don’t get caught with big medical bills and no savings – start contributing now so that the money will be there when you need it.
There is something to be said about taking the financial implications out of a medical decision. Yes, there are financials that surround medical decisions, but if you need a certain treatment but feel as though you can’t afford it, you might be making a choice that is harmful long-term.
8) You end up paying no taxes on qualified medical expenses
Since the money you put into your HSA is pre-tax and you don’t have to pay taxes, penalties, or fees when you use it for qualified health expenses, you are essentially paying for medical expenses with tax-free dollars. When I first found this out I thought “you’d have to be crazy to pay with after-tax dollars.” Crazy, or perhaps simply uninformed. Don’t pay for medical expenses with after-tax dollars when you can pay with pre-tax dollars.
For a list of qualified medical expenses check here. You may be surprised to find out that dental and vision expenses, among others, are qualified.
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As you can see, there are many compelling reasons to contribute to an HSA. Like regular contributions to a retirement account, I think it makes a lot of sense to also regularly contribute to an HSA. Worst case scenario you don’t use it and it ends up being a second retirement fund.
What are your thoughts on HSAs? Do you contribute to an HSA?
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Can you get an HSA with any insurance plan. I currently have health insurance through my employer. It is a more traditional plan with higher biweekly deductions from my paycheck with lower out-of-pocket visit costs and prescription costs. Or do HSA’s usually only come with high deductible plans? You raised some excellent points that make me think maybe we should start contributing to one if we are eligible.
BudgetforMore From my understanding HSAs only come with high deductible plans. I had a more ‘traditional’ insurance coverage my first year of work which had it’s own benefits. I only went to the doctor once that year (my asthma doctor) and the bill was $450 (specialists are expensive haha). But I only owed $50! If it was on an HSA plan I would owe the full $450 since I wouldn’t have hit my deductible yet.
that’s what I was thinking. I just don’t know if I like taking the risk that maybe we will have to pay cash for everything because of our high deductible. I like that with my current plan I know exactly how much my healthcare is going to cost. Yes there could be some exceptions for specialists and emergencies but overall I feel more stable with this.However there are some very appealing aspects of an HSA account like you mentioned above. great information DC.
BudgetforMore Initially an HSA can be “shocking’ if you haven’t had one, mainly because of the high deductible. I think after a year or two of having one and making contributions you don’t feel that sense of worrying about having to pay a lot, mainly because you have money in the bank and if you max out your insurance you won’t be on the hook for anything. There’s pros and cons to both, of course.
We started our HSA last year, but sadly no employer match. ;), and love having them – especially the tax deductibility aspect. We’re already working on maxing it our for this year as it’s a great way to have that EF you’re talking about for medical needs. With a catastrophic plan, it provides some peace of mind.
FrugalRules Yeah that’s one negative of being self-employed: insurance plans are ultimately more expensive because it’s you and only you contributing money.
I’m incredibly excited to have an HSA for the first time. I’ve been wanting one for years. I think it’s an incredibly powerful tool.
Matt @ Mom and Dad Money Awesome glad you have one! It has so many benefits.
I have a love/hate relationship with my HSA. I don’t like contributing to it (I do anyway) but I love it when money is there when we need it. We use ours mostly for dental since we don’t have dental insurance.
Holly at ClubThrifty Hmm I’m curious why you don’t like contributing to it? The tax advantages are huge and it really isn’t much different than an IRA (if you don’t use the money).
No HSA here, the fact that I have union insurance through June is a major win- then I’m off to the exchanges to see what I can get.
brokeandbeau Can’t blame you for taking advantage of the union insurance! There are plenty of HSA plans on the exchanges ;)
We have the option of investing in a HSA, but we do not use it. It has a ton of red flags attached to it. I may have to look back in to it to see if it’s worth it.
fitisthenewpoorRed flags?? Interesting…haven’t heard of this and would be interesting in hearing what they are.
I LOVE my HSA!! The best thing about it is the rollover feature. Health issues like life are not predictable, but anything is possible, so it is nice that you do not have to be accurate in any given year. Also love that it is portable and not tied to an employer.
blonde_financeYes the rollover feature is awesome. I like that if you contribute regularly that it doesn’t matter whether you use a lot of health care or not in any given year. Over time the balance should build up.
I’ve never heard of HSA. As you mentioned, we have FSA and I was never a fan of the use it or lose it policy.
Raquel@Practical CentsUgh I hate the “use it or lose it” policy of the FSA. I don’t understand why you’d want to give an incentive to spend health care dollars that may not be necessary. The carry-over feature of the HSA is a big plus.
Great points DC. I try to push anyone I speak to towards an HDHP/HSA but I think there isn’t enough information out there on them. I also like how they can be used toward any eligible medical expenses (of course as determined by the IRS as to what is eligible). For example, my plan doesn’t cover massage therapy. But, it’s an eligible expense, so I can use those sweet sweet pre-tax HSA dollars to pay for my massage.
ImpersonalFinanceGotta love those pre-tax dollars! I plan on never paying for an eligble medical expense with post-tax dollars ever again.
I love HSAs! I still need to figure out if my husband’s health plan comes along with one, it’s such a great way to save up some tax-free funds! I have an old one with my ex-employer, and I cannot figure out how much is in it!
Erin My Alternate Life Ah that’s too bad you are having issues with accessing your old HSA, but that’s great that you have some money saved for medical expenses in your carry-over HSA. Gotta love those pre-tax dollars.
It sounds pretty advantageous to have an HSA. I had actually never heard of it before reading PF blogs! Unfortunately, my plan doesn’t come with one, and I don’t think my boyfriend’s does either. Perhaps it’s a benefit to look for if we switch jobs.
JourneytoSaving I think it really depends on employers. I think a lot of employers have been moving towards the HSA because it’s cheaper for them (don’t quote me on that, I actually don’t know whether it is or not haha).
We don’t have HSA’s at my job. I’ve actually never had them… don’t know if it’s because I’ve never had a certain type of health insurance plan or what (I’ve always had PPOs without deductibles) but the only thing I’ve been offered was an FSA.
Considering my health costs are low after paying for my insurance, need for an HSA is moot in my case.
Tara Zee Even if your health costs are low an HSA kind of ‘cheats’ the system by offering a secondary IRA for people who don’t use the money on medical costs. With that being said, it really comes down to what your employer offers. If they don’t offer an HSA, it’s obviously out of your hands.
HSAs are a great benefit and it’s really sad that more people don’t take advantage of them. Some don’t really understand what they are or I think may confuse them with a FSA, so they think they have to use it or lose it. Some people are always scared by a lose it feature. :) In fairness, I would be irritated to lose my money too but I would hope if it was still advantageous for me to do, I would make sure I use it! LOL!
ShannonRyan Yeah I’m not a fan of the FSAs at all! I think there is a LOT of misconceptions out there about the HSA, or just plain lack of information.
We don’t qualify for HSA, I wish we did I would max it out. I’m going to open a flex spending for laser eye next year. They should amend the flex spending account to be like an HSA
Charles@gettingarichlife Yeah there’s pretty much no reason to NOT max it out. So many advantages.
I’m so excited to be able to invest my HSA in the stock market and take advantage of compound interest. Hopefully, it will make it so that we don’t have to buy premiums for long term care insurance. We can self insure hopefully.
Eyesonthedollar Self-insuring would be awesome and is totally possible – best of luck!
The HSA is by far my favorite account. It has the tax deferred investment options of a 401k, but can immediately be used for paying for medical expenses if I so choose. Then, at 65, it’s basically a mini 401k with no restrictions.
I love this post: it makes me want to give my HSA a hug.
DonebyForty Haha! That last line was awesome. It’s surprising/unfortunate how little some people know about HSAs, even people who have them!
This is some great advice and really makes me think I need to put more into our HSA. I haven’t added much to it recently as I already have a SEP IRA that I contribute pretax dollars into.
Kyle James So many tax-advantageous accounts, so little time ;)
HSAs are great especially if you KNOW you have a medical like bill coming up. My daughter is going to need braces, so we would be wise to start pumping some funds into there.
DebtChronicles That’s a good point. You can always start throwing money in when you know a medical expense is coming your way. Heck, because claims are usually somewhat delayed, you could even start contributing right after you get a bill.
That’s awesome that your employer has a $500 match on your HSA contributions. So many reasons to take advantage of your HSA. It’s too bad more employers don’t have them.
Thomas at ineedmoneyASAP I think more and more employers will offer them. Mine ONLY offers HSAs now. I’m assuming it’s cheaper for the company.
These HSA things are interesting… especially because in my benefits plan, HSA is Health SPENDING Account, a kitty pool of money for any health-related expenses which qualify according to tax laws. It can be used on prescriptions that aren’t covered (ie birth control) by the regular benefits, glasses/contacts beyond the set amount (which is ridiculously low, I think $250 every two years), whenever you go over your limit on massages/physio/stuff like that. It also covers crutches/braces/cast upgrades and anything that a doctor prescribes which may or may not be covered by the regular benefits portion.
My current employer contributes $2K to my HSA! It was a no-brainer to sign up for one!
I LOVE my HSA! It is only available to us if we choose the High Deductible Insurance plan- but I’ve done the math it makes WAY more sense! I use to pay close to $600 a month for regular insurance- yet still had $35 co-pays the 3 times I went to a doctor a year. With the HSA I spend $120 a month on high deductible insurance and put the difference ($480) in my HSA. For those 3 doctor appts a year- I now negotiate prices with doctors and pay with my HSA debit card- it usually costs me around $240 for all three. REMEMBER: Paying with your HSA debit card is like paying cash to your doctor- so they have no insurance headaches. I constantly ask what the cash price is- and you will be surprised a lot of doctors will work with you!
I’m so glad I found more information on HSA and how it can be so beneficial! I do have a HSA with an employer I recently moved on from to a new employer that doesn’t offer HSA. Will I still be able to add funds to the HSA, get it past $2000 and start investing? Or do I need to sign up for a health insurance that offers HSA?
Ugifter Very interesting. This is a Canadian plan you are describing, right?
LisaVsTheLoans Wow $2k is a ton of money! My company contributes $500 for individuals and $1,000 for couples/families.
MillennialCents Great point, though I’m not sure saying that paying with an HSA card is the same as paying cash. If you want to have the payments count towards your deductible your Doctor will still have to submit the claim to your insurance.
POMinFinance I’m not 100% sure about this. I believe you would have to sign up for a new plan that has an HSA account.
DC,
This is an old article you wrote— but I read one by Morgan on this site about health insurance plans and to NOT choose a catastrophic (ie- high deductible) plan— but here with the idea of an HSA, tax advantages etc it seems like it IS in fact a good idea? What would you do– I have a chronic illness, costly infusions every other month (11k without insurance, currently on a program through the drug company to offset 99% of the cost each time)– have a 13month old, healthy, but I have med refills every 3 months. We’ve always done the low deductible plan, but pricing it out between the low deductible (oop maximums, fha contributions) versus the high deductible (6000max, hsa contributions) the overall monthly “cost” to me is a $1 different. Which plan would you choose?
-Laura
If I received a gift of cash or an unexpected bonus, can I deposit it to my HSA? Or, since I have payroll deductions with my employer, are personal contributions like that not allowed?
Hi Sue, good to hear from you. It may depend based on who your HSA servicer is, but I just checked my HSA (through OptumHealth Bank) and you can easily deposit by linking a bank account. I believe there are also some “old fashioned” ways of depositing through a mailed check with a deposit form. Either way, there is a way to do it besides a payroll deduction.
…but if your not contributing from your paycheck then there is NO point in contributing as that money has already been taxed. Now you put your taxed money into your HSA and you no longer have access to that money. It must be spent on a very defined list of things that you may or may not ever need. Keep your money, its YOURS!
I think your comment is misleading, Eric. Regardless of whether the money is deposited directly from your paycheck or from a written check, the tax deduction is exactly the same at year-end. Sure, you’re employer may not calculate your taxes the same way if you mail in a check versus have it flow through your paycheck, but it’s 100% the same tax deduction regardless of how your money gets there.
I hate HSA and flex spending accounts. I have contributed to them at two different companies.
Here is what I HATE:
1) It is YOUR money that your putting in YET, you are limited to what you can spend YOUR money on AND whatever you do spend it on, say a dental co-pay you must get a receipt to prove the purchase is legitimate. Real pain in the butt trying to go back and get receipts printed to cover expenses with your own money.
2) The tax savings is very little. I contribute about $3k per year I figure I am saying what, maybe $300 buck on that money? I’d much rather keep my own money and spend or invest how I want. Once you contribute your money to an HSA or flex spending account it is not yours anymore to do with as you choose.
3) You can’t take money out of an HSA unless it is for a legitimate medical expense. The list of legitimate medical expenses not covered by health insurance is very small. So again, not very useful for most people. My health insurance did not cover my chiropractor visits, so I used my HSA for that. However the HSA benefits company would not approve those expenses w/o a written letter from the chiropractor and printed and itemized receipts for every visit. It was such a pain in the butt, i’d rather have just used money out of my pocket and not dealt w/ the hassle. Again, its my money and I can’t use it!
4) HSA’s do not gain interest so the money you pay into it sits, …I’d rather put that money to work for me.
5) Many HSA charge a fee per month, Mine is about $5 …so after a year that is $60, …so my tax advantage gets even smaller.
….
Hi Eric,
I think your comments are misleading. I’ll address each:
1) True you can only use it on qualified medical expenses, but it’s an extremely broad array of things that fall into that category. You technically only need receipts if you get audited, which the odds are slim (at least that is the case with the Optum HSA). Good records are always recommended, though, in case you need to prove anything.
Keep in mind that this acts as a retirement account as well. If you reach retirement age you can withdraw funds for non-medical expenses and simply pay taxes on it as if it was regular income.
2) This is dangerous logic as it basically says “shielding your income from taxes through tax-advantaged accounts isn’t worth it.” Again, this account can act similar to an IRA, but it has the added benefit of being available to pay for medical expenses tax free.
3) “The list of legitimate medical expenses not covered by health insurance is very small.” this is simply not true. The list of things covered is very broad. I do find it odd that your HSA benefit company is so involved in your management of funds. With my HSA you can literally withdraw dollars from an ATM to reimburse yourself.
4) “HSA’s do not gain interest so the money you pay into it sits, …I’d rather put that money to work for me.” 100% false. Once you hit a required minimum, say, $2,000, you can shift anything above and beyond that into an investment account. Your investment gains are not taxed. This is a HUGE benefit.
5) While this may seem like a lot for you, if you max out your HSA and shift dollars to an investment account the $5 fee is very reasonable. I have over $10k in my HSA with $8k+ in the investment portion of my account. The more I put in the less of a factor the fee is as a % of my total HSA fund.