The term “health savings account” isn’t a foreign one. It’s been around for a decade or two now, and the tool offers a way to use pre-tax money to pay for health costs, leveraging more of one’s income for medical costs than would otherwise occur with net paycheck money. However, HSAs, unlike other medical accounts, can work like regular savings accounts in the sense of one depositing and continuing to roll over the balance from year to year to build up a big medical nest egg for later years.
As an experienced employee benefits expert, Wellman Shew notes the most common use for an HSA is to help cover copay or out-of-pocket eligible health costs. Generally, this applies best in a high-deductible health insurance plan situation, where someone uses catastrophic health insurance to cover big bills and pays out-of-pocket for everything else. If for an individual, the deductible involved has to be at least $1,400 and no more than $7,050 annually. For a family, the figures double.
There’s also a lot of confusion with a healthcare flexible savings account or FSA. In that scenario, the saver can pull together a set balance for medical costs, but it has to be used in the same tax year or lost. The HSA has no annual loss situation, working more like a retirement account in that the deposits are capped at how much can be saved annually.
HSA contributions are not open-ended, however. They are limited to $3,650 per person, $7,300 for a family, and another $1,000 annually if 55 years or older. Again, the tool is used to get a 100 percent value of one’s earnings for medical spending versus after-tax earnings. Plus, Wellman Shew reminds readers that any investment gains while saving in the HSA account are tax-free.
Contribution adjustments can be made throughout the year as well. Contribution amounts can be increased or decreased as needed, allowing one to take advantage of promotions or changes in pay and flexibility when other costs come up.
However, probably the most interesting aspect of an HSA is that it works like another retirement account in practice. Wellman Shew has seen multiple employees and early savers use this aspect to their advantage long-term. Suppose someone is in the position of maxing out their contributions to a Pre-tax IRA, 401k, and similar and still wants to save with a tax deferment vehicle for retirement expenses that will eventually happen, including medical. In that case, the HSA can be used for the same above and beyond traditional retirement savings caps for the year. But it is important to remember, the federal government only allows so much money to be put in tax-deferred official retirement accounts.
The HSA avoids the otherwise painful tax penalty and forced withdrawal that occurs from putting too much in regular retirement accounts. In Wellman Shew’s opinion, this last piece is probably the best way to play an HSA as part of a bigger savings portfolio strategy, especially when looking at an overall approach towards one’s retirement long-term.
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