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?
Time for some shoppin’
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.
I checked out my insurance company’s friend that the stupid flyer recommended — HealthEquity.com –who gave me a few options.
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.
HealthEquity’s plan:
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:
I checked out the HSA administrator that Vanguard recommended too — HealthSavings.com — because, all things being equal, I still prefer my VTSAX.
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?
This is what I imagine fashion will look like 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!
Thanks for the write up about HSA. Are you still planning to sharing your thought process on ACA and what you ended up selecting? I think you mentioned it last month that you were going to, but unless I missed it, I couldn’t find it. Thanks.
One thing I hadn’t realised about HSAs until someone told me: the definition of medical is far broader than “doctor visit”. It can include many things not covered by health insurance. So, though while I originally thought it was a good way to pay immediate medical expenses, they suggested thinking of it more as another retirement savings vehicle, with the income accumulating tax free and paying expenses out of pocket instead. As they suggested, there are likely plenty of medical expenses after 65 to spend it on. Better to use tax-free accumulated money for those.
Of course regulations change, your mileage may vary, etc etc, but is was an interesting perspective.
Your health insurance link at the top just leads to a blank page and not your other article.
Thanks! Fixed.
And also there are certain types of health care adjacent companies that would allow you to purchase gift cards if you had any concerns about using/meeting required usage amounts (my eye doctor, for instance).
I doubt it, but you’d have to do more research to see if that was allowed. You can for sure be reimbursed for eye doctor appointments and glasses and the like, but I don’t know about gift certificates specifically.
The amazing thing about HSA accounts is that they pay for a lot more than you may think: medical, dental, vision, prescriptions, future family members medical expenses, ect.