After the economy suffered a downturn and my employer cancelled their health insurance program in 2010, I switched to individual insurance and started to leverage the power of a health savings account.
Long-time readers will recall that it was not only the awesome tax benefits that made the HSA such an attractive choice, but that the HSA-enabled plans were significantly cheaper than most of the other options. As a reminder, we ran the math and determined that we’d come out ahead even if we had to pay our entire deductible, every single year, which is still a relatively-low $3,000 right now.
As a result, and even with some rate increases, we continue to use the same HSA plan and fund our health savings account to this day.
My attention has now turned to a new question: how can I leverage the HSA even more? The key lies with how the funds in the account can be used, now and in the future.
HSA Rules
Health accounts are subject to many rules, but here are some basic concepts:
- To contribute, you must have active health insurance that’s “HSA-compatible,” sometimes known as a “high-deductible” plan (though not all HD plans are HSA-friendly).
- You can contribute up to a certain amount every year, which accumulates in your account. The 2012 family maximum is just over $6,000 per year.
- Most importantly, withdrawals can be used to pay for qualified medical expenses at any time, even if your health insurance no longer qualifies you to contribute.
- With a family HSA account, you can use the funds for ANY family member, even if they don’t have a qualifying plan.
- Finally, deposits are tax-deductible AND funds can be invested AND you can withdraw everything penalty-free after age 65. In that sense, it essentially acts like a Traditional Retirement IRA.
Case Study
How does that translate into a plan of action for your money?
Many people with HSAs treat them as complimentary to their health insurance. They save enough to cover their deductible if something should happen and turn to their regular or retirement savings for everything else. I think there is a better approach.
The key lies in some of the HSA rules above, and the current definition of a “qualified medical expense.” Let me give you an example of how things could play out in our own life.
For the next 10 years, we could put a little over $6,000 into the health savings account, and assuming no investment income, we would be looking at deposits of over $60,000.
First, let’s point out that the entire $60,000 was most likely tax-deductible and already saved me thousands of dollars in additional tax that I didn’t pay.
Next, let’s say that we reach the deductible on our plan two out of the 10 years, which costs us $6,000. Additional doctor’s visits for sicknesses and check-ups might cost us another $10,000 overall.
We might have another baby, and depending on the health plan my wife has at the time, pay another $5-$10,000 from this fund. (Even though her own plan is not HSA-enabled, I can still use the family-HSA funds for her needs).
Next, I have my yearly ophthalmologist appointments and get 5 new pairs of glasses during this time, one every 2 years. That might be another $1,500. My kids grow up and need dental care, particularly braces. Cha-ching! Let’s just say that’s $15,000 for the sake of argument.
At the end of year 10, I decide to switch insurance plans, and have spent $42,500 on medical expenses, with $17,500 still remaining in the account. While I can no longer fund this account, I can still use that entire amount tax-free for any medical expenses until the day I die, and I can withdraw it penalty-free in a manner similar to a Traditional IRA once I hit retirement.
As more and more of us live longer and need extensive medical care in our elderly years, this kind of account can be hugely beneficial to a family’s finances. You get the tax and health benefits now, in your working years, and get the enjoy the additional tax benefits and your thoughtful pre-planning in retirement.
In addition, you get to pay you entire family’s medical expenses with pre-tax dollars, and you can use the money for very expensive (and rarely covered) medical procedures, like the braces I mentioned, or the removal of wisdom teeth, and on and on…
Conclusions
Medical HSA accounts are fantastic vehicles for short-term health spending and a key component if you have a high-deductible plan, but they can be even more powerful if leveraged for the benefits they will provide in the future, for yourself and your family.
Pretax accounts are great! I use a flexible spending account (FSA) for medical expenses.