Many of us choose Health Savings Accounts (HSAs) along with high deductible health insurance because we accept the trade off. We suffer the potential high out of pocket medical costs in return for gaining access to an employer-subsidized health care savings account The idea is that your employer and you put money aside in an account to cover health care expenses for your family. Then when you incur a big medical bill, you’ll pay your deductibles and coinsurance from the HSA.
There are three key tax advantages to HSAs. Any funds your employer or you put into the HSA are deductible on your federal and state taxes, are not subject to Social Security tax. You also benefit from tax-free growth of the HSA. The third benefit is that all qualified distributions from HSAs are tax free. In short HSAs have many of the advantages of Roth IRAs with their tax-free growth and distributions, with the added advantage of the upfront tax deduction. Annual limits to HSA contributions apply to those made by the employer and employee. The maximum for 2019 is $7,000 for a family plan, and $3,500 for an individual plan. If you’re 55 or over, you can put in an extra $1,000.
Some shy away from HSAs confusing them with their spiteful cousins, Flexible Spending Accounts. Flex Accounts have the dreaded “use it or lose it” problem. If you don’t spend your Flex Account by March 15th of the year after you contribute to it, the balance must revert to your employer! In contrast, your HSA is your money to be used to pay for your family’s medical expenses at any point, including decades in the future.
In order to secure the HSA’s tax benefits, use the proceeds for qualified health care expenses. As you might expect, this includes any payments to health care providers and for prescriptions. Less obvious expenses include health insurance premiums paid out of pocket in the future, including Medicare premiums. Long term care costs (and many insurance premiums) can also be reimbursed by an HSA.
You usually will not have much choice about the financial institution used for the HSA account when your employer puts funds aside for you. It’s often like a bank account, with low interest paid on your balance and a debit card to pay qualified expenses directly. As HSA accounts have proliferated and balances have increased, it has become common for plans to offer investment options in low-cost index mutual funds. A recent and welcome entrant to the market is financial service behemoth Fidelity, which offers investment options with rock bottom expenses and no annual or administration fees. If you have an HSA balance that you invest for the future, you should strongly consider transferring your funds to a Fidelity HSA.
Consider all the benefits of an HSA: its triple tax advantage, personal ownership of account, flexibility to use it toward qualified expenses far in the future, and ability to invest it into stock index funds. When you put them together, you see the positives of an emerging trend. Instead of using your HSA to pay for health care expenses that you have today, invest the funds for the long term to cover your costs in the decades to come. You get the tax benefits of putting funds into the HSA and tax free growth to cover your health care costs in the future. So think hard about putting your HSA debit card away now to leave funds to grow for rapidly escalating health care costs.