Would having $500,000 tax-free dollars sitting in an investment-like account be incentive enough to open an HSA today? I think so. That’s why I max out my HSA every year that I can.
First off though, what is an HSA? An HSA is a Health Savings Account. It works like a savings account, but has certain rules attached to it.
In order to contribute to an HSA, there are three rules you need to know.
1. You must have a qualified High Deductible Health Plan
Each year the IRS defines how high the “High Deductible” must be in order to qualify for an HSA.
For 2019, it is $1,350 for an individual person or $2,700 for a family.
For 2020, it is $1,400 for an individual person or $2,800 for a family.
If you’re not familiar with High Deductible Health Plans (HDHPs), they are simply health insurance plans with higher deductibles than traditional health insurance plans. Hence, the clever name. The monthly premiums are typically less for an HDHP than a traditional plan, but you pay more out of pocket when using medical care. (Until you reach your deductible and out-of-pocket max’s.)
As a reminder, deductibles are what you pay before the health plan will pay for anything. Once you meet your deductible, the health plan will split the medical costs with you. They often pay somewhere around 80% of the cost.
2. You can’t be on Medicare
If you are under the age of 65, you don’t have to worry about this. Medicare is for those older than 65 or those with certain disabilities.
3. There are annual contribution limits
This is another number the IRS defines each year. This is the max amount that you’re allowed to contribute to the HSA, assuming you have an HSA and meet the previous two rules.
For 2019, it is $3,500 for an individual person, or $7,000 for a family.
For 2020, it is $3,550 for an individual person, or $7,100 for a family.
Here’s a chart to summarize the rules:
The 6 Reasons you need a Tax-Free HSA Today
Okay, so now you know the basics of what an HSA is and how much you can contribute per year.
Here are 6 compelling reasons why you should contribute.
1. The Tax Benefits
This is one of the most tax advantaged accounts available to Americans, if not the most. The HSA is often referred to as a triple tax advantaged account. But low and behold, there is a bonus fourth tax advantage that is often over looked.
a. HSA Contributions are Pre-Tax Dollars (aka Tax-Free Dollars)
b. HSA Growth is Tax-Free
All the money you make from investing (see reason #3 below) is tax-free!
c. HSA Withdrawals are Tax-Free
Assuming you follow the withdrawal rules for qualified expenses.
d. BONUS: No FICA Taxes
The money that goes toward Social Security and Medicare is called FICA (Federal Insurance Contributions Act) taxes. The money you put into a 401(k) or other retirement plans is still subject to Social Security and Medicare taxes, but your HSA contributions are not.
HSA money is tax-free from just about every angle. Let’s take a look at the saving of someone who makes an average American income (+/- $48,000 AGI), and therefore falls in the 22% tax-bracket.
Wow, the average person just saved over $2,500 bucks! The savings alone could grow to a significant amount over time, if invested well.
2. Not a use it or lose it
Unlike the Flexible Spending Agreement (FSA) or the Dependent Care Flexible Spending Account (DCFSA), your money rolls over year to year. You will never lose this money! (Unless you place it in a bad investment.)
3. Can be invested
That’s right! You can invest your money just like your 401(k) or your IRA. It can even be self-directed.
4. Can pay for prior year medical expenses
Let’s say you were unsure if you should use your HSA to pay for a medical bill or save the money and pay out-of-pocket. Years later, you do the math and determine it’s best to take the money out of the HSA. That works! You’re allowed to do that. Or maybe it is more tax-advantageous in a subsequent year. Who knows what the future holds? Tax rates are at historic lows currently.
A second scenario could be that maybe you forgot about your HSA. I know none of US would ever forget about money, but it happens. And if it does, you’re covered by your HSA. The only caveat is that the medical expenses must be incurred after creation of the HSA.
5. Independent of Health Insurance plans
A change in insurance plans doesn’t mean you need to close your HSA. Once you have an HSA, it is yours to keep. Even if your new plan is not a high deductible policy and does not qualify for an HSA. An HSA can be used to reimburse eligible medical expenses, even if they are incurred under a health insurance plan that wouldn’t qualify for an HSA. The only caveat is that the HSA must have been established before the medical expenses were incurred.
6. Can Cover Dental & Vision, along with random medically related items
There are a whole host of medically-related items that the HSA can cover. For example, sun block can be reimbursed from your HSA. The bigger, more relevant items though are vision and dental expenses. Often under their own insurance plans, separate from your medical insurance, most vision and dental expenses can be reimbursed.
The $500,000 Reasons you need a Tax-Free HSA Today
Okay, we covered 6 compelling reasons you should be investing in your HSA. Only 500,000 more to go. Luckily, a table can easily explain these reasons, showing what the power of compound interest can do if you invest your HSA dollars.
And look at that! After 25 years, you would have over half a million dollars, which only cost you $175,000 (assuming you did not use any money along the way). Worth the trade if you ask me.
If you want to create your own table with your own numbers, check out BankRate.com. I based my spreadsheet off their compound interest calculator.
I added in years 35 and 45 to further show what the potential could be. Consider that a person who starts working in their 20s and retires at the age of 65 will have worked somewhere between 35 and 45 years. Having a balance of 1 or 2 million would sure help out in retirement, I’m sure, especially considering the uncertainty of medical expenses and medical insurance.
If you can afford to pay your medical bills out of pocket, it would be well worth it to invest in an HSA. If you ever need the money, you can then come back and take it out (and the growth) tax-free. There rests my argument on why you should open a tax-free HSA today!