Why would I spend my time learning about HSAs?
It’s certainly not something I thought about in any detail prior to a couple of weeks ago. But, you may remember my last harrowing article on insurance. Well, my new health insurance plan sent me a flyer in the mail reminding me that my health plan includes a FREE HSA, so I decided to check it out.
I am so glad I did. Because the perks! Oh, the perks!
HSA stands for a health savings account. It is exactly what it sounds like – a savings account for health expenses. It’s designed to help people with high deductible health insurance plans save to pay for medical expenses. Warning: it does require some rather boring research.
But the perks! Oh, the perks!
Do I qualify for an HSA?
My health insurance plan’s flyer told me I qualified for this HSA, but I double checked the IRS site because I don’t like getting tax advice from a flyer.
- I must have health insurance through a high deductible health plan on the first day of the month;
- I may not have any other health coverage except what is permitted.
- I cannot be enrolled in Medicare.
- I cannot be claimed as a dependent on someone else’s tax return.
If the statements above do not apply to you, I suspect that you’ll find the rest of the article pretty boring.
What are the perks of my HSA?
The reason I like this HSA so much is because it changes my behavior only slightly, but gives me a lot of tax benefits. I have a high deductible on my health insurance. I would need to spend $6,000 out-of-pocket on medical expenses before my insurance company pays a single silver dollar.* Thankfully for the insurance company, I intend to stay firmly in the profitable column for them. I expect that I can easily handle the expenses for my medical needs by myself and I hope that chance and the universe do not decide otherwise. So while I reckon I won’t spend $6000, I most certainly will pay some amount of money for some health related tune-up at some point in time. I can use the money in my HSA account to pay for these expenses.
First, I take some money and open an HSA account. I can then claim a tax deduction for a proportionate amount in the year I invest it! Tax benefit one!
Next, I live my life exactly as how I would have lived my life otherwise with one notable exception. I take meticulous care to keep and scan in any medical related receipts and tell my purging tendencies to speak with my love of organization if there’s a problem.
I occasionally check in on the money to say “hi”, knowing that all of it, even the interest and earnings I hope to accumulate, aren’t taxed. Tax benefit two!
When I’m keen, I can take out some money from this account and I won’t have to pay tax on it! As long as I have the same amount in medical receipts, I don’t have to give Civilization squat! Tax benefit three!
Also, it’s my money and my account. It’s not tied to any job or insurance and I can take it with me wherever I go.
How much can I put in my HSA?
HSAs have pretty strict limits on how much you can put in them. As an under-55 individual, my maximum contribution tops out around $280/month.
2015 tax year
- $3,350/year for individuals ($4,350 if you’re over 55)
- $6,650/year for families ($7,650 if you’re over 55)
- $3,350/year for individuals ($4,350 if you’re over 55)
- $6,750/year for individuals ($7,750 if you’re over 55)
I can fund twelve months at a time if I like, but I will pay penalties if I stop qualifying (e.g. I find a job and join my employer-sponsored health plan that doesn’t have a high deductible) before the twelve months are complete.
There’s no science behind my numbers, but ideally, I would like to fund my HSA six months at a time. This will give me some personal flexibility in terms of my real life and financial flexibility in terms of the market. Only having to think about this twice a year appeals to my lazy side as well. Six months of HSA funding would put my initial investment at $1675.
Where can I put my HSA money?
Okay, so where should I put this money? My immediate thought was, of course, my precious VTSAX. Sadly, Vanguard is not directly in the HSA business. Sigh. And that’s when I realized I would have to do research not just on what this HSA thing actually meant, but also on the best administrator for my HSA.
Disclaimer: Numbers change ALL THE TIME, so while this is the most annoying part of the research, I highly recommend that you calculate all the fees before deciding. Your employer or plan sponsor may pay some of them for you.
Checking Account-ish option
The first option works basically like a checking account. This is what the flyer meant when it advertised my FREE HSA. I don’t know how this option would work for anyone while interest rates are so abysmal. For example, I would receive just under $5 in interest for my $1675 and my insurance company would pay the $4 monthly administration fee.
Pros: No minimums required. FDIC Insured. Uh, the health insurance pays the maintenance fee?
Cons: Sucktastical interest rates means I’m losing money after inflation.
Savings Account-ish option
The second option works more like a savings account. I would have to boost my initial investment from six months of HSA funding to just over seven months ($2000) or pay a $4/month fee.
Pros: Slightly better interest rates, but only marginally so.
Cons: Not FDIC insured. Still losing money after inflation. Monthly fee kicks in if I don’t keep minimum balance.
Investment Account-ish option
HealthEquity also offers an investment account option. This is what I knew I wanted before I came in – using the power of compounding interest for my benefit and not for the bank’s benefit.
To use this option, I would have to boost my initial investment from six months of HSA funding to nine months ($2500). Unfortunately, I would always have to keep the minimum savings account balance ($2000), in the less than ideal savings account.
Pros: Intoxicating possibility and decent probability of higher rates of return from investing in the market, ability to invest in low-cost Vanguard funds – including VIIIX which has an expense ratio of .02%
Cons: Not FDIC insured, terrifying possibility and low probability of lower rates of return, $2,000 is perpetually stuck in low-interest hell to avoid the most egregious fees, a .033% monthly administration fee
HealthSavings Administrators plan:
Pros: Intoxicating possibility and decent probability of higher rates of return from investing in the market, no minimum bank account requirements, can buy more VTSAX!
Cons: Not FDIC insured, terrifying possibility and low probability of lower rates of return, unavoidable $45 annual fee , 0.0625% custodial fee
I’m sure there are many other HSA administrators out there, but I’m really really tired of thinking about this topic and my motto is: Don’t let the perfect be the enemy of the good.
What happens to that HSA money in the future?
There are so so so many what-ifs that make planning for the future nebulous. Maybe the government changes the rules for HSAs in 20 years. Maybe the market tanks. Maybe I find a job I feel passionate about that doesn’t offer high deductible plans. Maybe climate change will kill us all.
Remember, plans are worthless, but planning is everything. Here are the possible scenarios I envision.
Great scenario for life, good scenario for tax purposes:
I have more money in my HSA than the amount I paid in medical expenses since opening the HSA. I turn 64 (or earlier if I prefer), take out as much in my HSA as I have in acceptable and documented medical expenses without paying taxes on that portion of my distribution.
A year later, when I’m 65, I can take out the surplus and pay regular tax on the distribution, losing the third tax perk I mentioned above.
Good to terrible scenario for life, great scenario for tax purposes:
I have more medical expenses than the amount I put in my HSA. I can take out the money at any time with no problem and no tax implications.
So that’s it! I picked HealthEquity and I now have $2500 in my HSA growing tax-free and a strong incentive to stay retired for at least nine months. Winning! And here’s a bonus organizational tip – I put a calendar reminder for eight months from now to add more money.
*Okay, that’s not COMPLETELY true. My insurance paid for the flu shot I received a few weeks ago and will pay for other preventive care. Woot!