If you work for a big company, it’s almost that time again – the time to enroll in your benefits. This is the only time when you can review the benefits you’re offered by your employer, see if anything’s new and then try to determine exactly which ones would be best for you.
This is probably the only time of the year you can change your benefits unless you have a major milestone in your life such as a birth, marriage or death. Given this, we thought it important to reveal on one health benefit that’s becoming increasingly but is rarely understood – Health Savings Accounts (HSAs).
One of the best retirement savings accounts available
We probably don’t have to tell you how complex is the US federal tax code but the way it’s currently written is that one of the top savings accounts for retirement available will not only help you retire but will pay for your healthcare expenses. That will allow you to avoid one of the debt situations that you do not want to have – unpaid medical bills. For the past several years, HSAs have been increasing in popularity. According to one recent study done in 2016 by the National Business Group on Health 72% of large employers now offer HSAs, which is an increase from 40% in 2010.
How they work
While it’s possible to create your own HSA, the biggest majority of them are sponsored by employers. They are typically associated with a healthcare plan that has high deductibles and the money in them is used mostly to pay for medical expenses you have to pay out of pocket. They are funded with deductions made from your paychecks and the IRS limits how much you can contribute annually. The cap in 2016 is $3350 for individuals and $6750 for families. In addition, if you are over the age of 55 you can contribute an additional $1000 per year.
With most HSA’s you will be given either checks or a debit card linked to the balance in your HSA. They can then be used to pay for your medical expenses. And this includes co-pays, deductibles, coinsurance and any other medical expenses not covered by your health care plan. However, insurance premiums generally cannot be paid for using HSA funds.
If you’re not familiar with a high deductible health plan with a health savings account, here’s a video that explains their basics.
The income tax benefit
The money you contribute to your HSA is tax deductible and this is why the IRS limits you need to learn how taxes can have a brutal effect on your savings. In fact, the income taxes you pay are one of the single biggest factors that affect your ability to achieve financial independence. A good analogy is if you were trying to run a race but instead of beginning it at the starting line with all the other racers you’d have to start 25% or even 33% back from everyone one else. Or imagine that each time you completed a mile you would be required to go back 25% or even 33% and start all over. Well, this is how paying taxes affects the money you earn every year.
Why an HSA is such a good deal
What makes HSAs such a good deal is that the money you contribute is not only tax deductible the year you make your contributions but is also tax-free when you withdraw it for your qualified medical expenses. Let us say that again. They are tax-free so long as you use the money for medical expenses making both your deposits tax-free and your withdrawals tax free. That’s, as one presidential candidate was fond of saying, is uuge!
What happens to the money you don’t withdraw?
This money sits safely in a brokerage account where you can invest it in the stock market or keep it as cash much as you would with an IRA. Most experts say the best strategy is to keep about a year’s worth of your HSAs deposits in cash and put the rest of the money in the stock market just as you would with your other retirement accounts.
The secret HSA tax benefit
The best strategy you could use with your HSA if you can and that’s to make the maximum contribution each year but pay all of your medical expenses out-of-pocket – without taking a single cent out of your HSA. If you do this, your investment returns will always grow each year and compound!
If you keep all the receipts for your medical expenses, then later – maybe after retirement – you could then pay back yourself for all those old medical expenses even if they were many years ago. That makes it critical that you keep all of your receipts. Once you reach age 65 you will no longer be able to contribute to your HSA but will still be able to use the money for your out-of-pocket medical costs. However, if you use the money to pay for non-qualified medical expenses you’ll be required to pay income taxes on the money, plus a penalty if you’re under the age of 65.
Just think what would happen if you invested $6750 each year and it compounded with 7% returns that were tax-free. You would have $93,000 of tax-free money after just 10 years. And after 15 years you would have an amazing $170,000! And again, all that money would be tax-free.
If your employer doesn’t offer HSAs
What could you do if your employer doesn’t offer an HSA or you’re self-employed? You should be able to open a separate HSA account at almost any financial institution.
Since it’s now that time of the year to enroll in your benefits you need to carefully review your options. If you find you could create an HSA account you need to think about this seriously and if you sign up, try to and max out the 100% if possible. The bottom line here is that an HSA is not just a healthcare expense account. It’s a lot more. And it just might help you live the retirement you’ve been dreaming about.