Today I want to discuss the “triple tax advantage” offered by Health Savings Accounts (HSA). With most of the key provisions of the ACA effective Jan. 1, 2014. Health Savings Accounts are tax-advantaged medical savings accounts. Similar to retirement accounts, HSAs offer both a savings vehicle for future expenditures as well as some nice tax advantages.
Here are the three tax advantages you get with an HSA:
1) Money deposited is on a pre-tax basis
Similar to how funds are deposited into a 401(k) account on a pre-tax basis, HSA funds are also deposited on a pre-tax basis.
2) Funds may be used for qualified medical expenses without tax liability
Not only are funds in an HSA pre-tax, they also can be used at any time for qualified medical expenses without a tax liability. This is a huge tax advantage, as people who do not have an HSA account are paying for similar medical costs on an after-tax basis.
3) Investment income is not taxed
Let’s say you deposit $3,000 a year for three years to your HSA Account. If you only end up using $1,000 of that $9,000 accumulated, you would have $8,000 left sitting in the account. With an HSA, you can invest that money similar to a retirement account. The gain you make on this investment is not taxed as long as you use the funds for qualified medical expenses. If this account was built up over a long enough time frame, you can very easily have a large asset on your hands.
A couple notes about HSA Accounts:
- In 2012 an individual can contribute up to $3,100 to an HSA. The family limit is $6,250.
- Funds in an HSA roll over year-after-year, so you don’t have to use up the balance in the account each year. On the contrary, it’s a good idea to try to build up the balance over time.
A major drawback of the HSA is that they are high deductible. For example, you may have to pay the first $3,000 out of pocket before the insurance company starts paying the brunt of your medical costs. While this is a disadvantage, if you build up your HSA funds you won’t feel the pain (as much) and have a safety net in place for medical costs.
For someone like me who has a few medical issues that can creep up at any time (asthma, allergies, sinus issues, etc.) I find comfort in having an account that is designated for medical costs. When you combine that with the fact there are some big tax savings from an HSA, I definitely think an HSA is something everyone should consider using.
Do you have an HSA? If not, what insurance plan do you use? Would you consider switching to an HSA?
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I don’t currently have an HSA, but our company plan may be switching to one next year. Our only issue with HSA is that my wife is a high user of health care, so we’ll most likely be using up those funds from our HSA account every year to pay the deductible. We’ll see! I do love the tax savings that come along with the account – so hopefully we’ll be healthier in the coming year!
@moneymatters Yeah that’s definitely the negative of the HSA, that you can use up all the savings in one year. Unfortunately we may use up everything we put into it (including the $1k the company puts in) but we did only put in half the maximum. I like the idea of building up a balance over time. I’m hopeful that if we max out ours that over the course of a few years the balance will keep growing even if we do run into some pricey health care costs.
Don’t forget the primary advantage – lower premium costs. Many young adults find an HSA ideal, especially for single men as many rarely visit doctors.
Once they get married and think about having children, an HSA may not work as well. One normal delivery can consumer an entire year of savings. Lower deductible plans may work better during this life stage.
@khaney1116 Not sure how I missed that! That’s one reason I switched to the HSA in my second year of work.
That’s a good thing to keep in mind. On my HSA for a family $8k is the maximum out of pocket. So if you did exhaust it all (it would take some big bills, but it could happen) and you put in the max, you’d still be on the hook for $1k ($6k maximum allowed contribution + $1k put in by company). But you would still reap the tax benefits….hmmm….
I have an HSA. Our plan is actually priced to the point where we end up doing much better going with the HSA than PPO plan. I didn’t max mine out this year but I just might next year. We’ll just have to wait and see. I have no doubt that eventually I’ll end up going through the entire amount in medical expenses. When you get old medical bills add up fast!
@Money Life and More That’s awesome, I did not have an HSA the first year and I used almost no health care (besides rx, I only had to go to the doctor once). I was kicking myself for not starting the HSA earlier!
For sure, it only gets more and more expensive as you get older and if it’s not coming out of an account like an HSA it’s coming out of your retirement.