When it’s open enrollment time for your health insurance, I encourage you to consider choosing a plan that includes a Health Savings Account (HSA). If you already have an HSA, ensure you’re taking advantage of all the many benefits.
I opened my own HSA and started contributing and investing years ago. In retrospect, it was one of my most savvy financial decisions.
A Quadruple Tax Break!
1. Tax Deduction on Contributions–Money contributed to your HSA is not taxed, reducing your tax bill each year you contribute. This deduction benefits all savers but especially higher-wage earners who stand to save the most in taxes.
2. Tax-Free Distribution of Contributions–Unlike traditional contributions, which are taxed when you take them out, your principal is tax-free when withdrawn.
3. Tax-Free Distribution of Earnings–All earnings (interest, dividends, and capital gains) accrue tax-free in an HSA. Earnings are not taxed upon qualified withdrawal.
4. No Payroll Tax Deducted–You only get this deduction when contributing to an HSA through your employer, but don’t overlook how much it saves. Payroll tax consists of both Medicare (1.45%) and Social Security (6.2%) tax. Note that payroll taxes are deducted when making 401(k)-type plan contributions.
With pre-tax contributions to a 401(k)-type plan or traditional IRA, you enjoy #1, with Roth contributions to a 401(k)-type plan or Roth IRA you get #3. With an HSA, you get all 4!
Contributing and Saving
If you have employer-sponsored health insurance, contributing money to your HSA is both easy and lucrative. Sign up for automatic deductions from your paycheck. That ensures you get that extra very valuable tax deduction (#4).
If you have private insurance, you need to make your own HSA contributions directly and don’t benefit from tax deduction #4; However, it’s you who gets to choose your HSA custodian rather than your employer.
Much like 401(k)-type plans, some custodians are better than others. I like the HSA offered by Fidelity Investments.
Investing in Your HSA
Investing in an HSA isn’t “my” strategy. I first heard about it in 2011 at the White Coat Investor, a physician-specific personal finance and investing website. I realized I had stumbled onto the most powerful wealth-building tool on the planet.
Many more HSA custodians are now offering investment options. If your employer’s custodian doesn’t, don’t fret. Simply open a new HSA that offers investment options and transfer the money you want to invest there. Keep the old HSA open, though, especially if your employer funds your HSA (many do).
Choose Your Strategy
The way I see it, you have 3 HSA strategies from which to choose. Each has its own merits, and you can always change strategies at your next open enrollment.
Take the Money Now
Estimate your medical expenses for the upcoming year. Set your payroll deductions so that amount is deposited into your HSA account. Reimburse yourself with tax-free dollars from your HSA throughout the plan year as medical expenses occur.
The HSA Double Dip
Estimate your medical expenses for the upcoming year. Make the maximum HSA contribution allowable by law, even if that amount is greater than your estimated medical expenses. (The contribution limit is indexed for inflation and is increased most years.)
Set aside enough money for your estimated medical expenses in your HSA’s least-risky account and reimburse yourself throughout the year for those qualified medical expenses. Invest the remainder. If your employer contributes to your HSA, invest that money too.
Take It to the Max
Make the maximum HSA contribution allowable by law. With this strategy, you don’t reimburse yourself for medical expenses. Pay for those medical expenses out-of-pocket, not from your HSA. Save those medical receipts for later redemption and invest your entire contribution for long-term tax-free growth. Depending on when you start, you could even approach HSA millionaire territory!
Not for Everyone
Health Savings Accounts aren’t for everyone. A requirement for contributing to an HSA is choosing what’s called a high-deductible health plan. They can have higher out-of-pocket maximums and minimum deductible limits than other health plans, potentially increasing your insurance costs when you require care.
I’ve seen employer-sponsored plans where the difference between their low and high-deductible plans is minimal, making the high-deductible plan and HSA a more desirable choice no matter your financial circumstances. That’s why it’s important to review all of your healthcare choices during open enrollment.
Strengthen Your Financial Future
Opening and contributing to an HSA are among the smartest financial moves you can make. Maximize Your Earnings with a Health Savings Account gives you the strategies, insights, and step-by-step guidance to take full advantage of this remarkable account. Get your copy today and be ready for your next open enrollment.