**This post is updated from a previous post for 2017 IRS limits**
What is a health savings account (HSA)?
A health savings account is a tax-exempt account to pay or reimburse certain medical expenses. I contribute to a health savings account because my employer only offers a high-deductible-health plan (HDHP), and this plan offers significant advantages to cover medical expenses versus pulling money from your emergency fund or paying out-of-pocket.
A health savings account is a great vehicle to help you cover medical expenses. Even if you are a young person, I recommend saving money into an HSA because you never know when an unexpected life event can occur.
Additionally, you should check with your employer if a high-deductible plan is an option because some employers contribute money into an HSA. My employer used to contribute into my HSA (the premiums have gone up significantly the last few years so they no longer contribute), and I used the money to get LASIK. That is correct, I didn’t have to pay for my LASIK, which cost $3,200!
First, I am going to discuss the advantages for saving into an HSA. Second, I am going to review much you can contribute each year. Finally, I will explain how you qualify to save into an HSA. I also recommend checking with your HR person to discuss exactly how your company’s HSA is set up.
Advantages with a Health Savings Account
My wife and I had our first child, a sweet little girl, late last year (2016). We saved into our health savings account over the years, which helped cover the medical costs. However, not many couples plan on the extra bills that appear before the child comes.
Obviously, there is a large bill for your hospital stay when you deliver, but there are many check-ups before the baby comes that can add up depending on your health coverage. Having a nice safety net in our HSA made paying these bills much less stressful. Now on to the details of an HSA.
Quadruple Tax Advantages
1) Claim a tax deduction for your contributions
2) Invest the money in your HSA and the gains grow TAX-FREE!
3) You can pull the money out tax-free for qualified medical expenses at any time
4) No FICA taxes with direct deposit
1) If your employer contributes to your HSA account, the money is not included in your gross income.
2) Unlike a flex spending account (FSA), the money in an HSA does NOT have to be used within a calendar year because the money remains in your account until you use it – even into retirement!
3) If you leave your employer, your HSA stays with you – it is portable.
4) When you turn 65, you can pull the money out like a normal retirement account and you will only be taxed at the ordinary income level you are at for that year when used for non-qualified medical expenses.
5) You can also pay out-of-pocket for qualified medical expenses and later reimburse yourself from your HSA
This last point is the most exciting (at least it is to me!)
If you keep track of all of your health expenses that you pay out-of-pocket, you can reimburse yourself at a later date.
What does this really mean?
You leverage the 7th wonder of the world: COMPOUND INTEREST!
You receive the benefits of a 401(k) and a Roth IRA – the pre-tax deduction (401k) and the tax-free growth and tax-free withdrawal (Roth IRA). This could end of being a significant amount of money if you start at a young age. Hopefully, you don’t have many medical expenses over the course of your life, but if you have children you will definitely will (speaking from recent experience!)
So keep track of those expenses! Every time I pay for a medical expense out out-of-pocket, I take a picture of the receipt with my phone and I save it in a folder in Google Drive.
So how much can you contribute to an HSA?
Each year the limitations on how much you can contribute to an HSA change. For 2017, if you are single you can contribute up to $3,400, which is up from $3,350 in 2016. If you have a family coverage, you can contribute up to $6,750 – the same as in 2016. If you are age 55 or older, you can contribute an additional $1,000.
How determine if you are eligible to contribute to an HSA?
1) You must be covered under an HDHP. Below are the guidelines for the minimum and maximum deductibles for HDHPs, but to be safe, your company should inform you regarding the type of health plan(s) they offer.
2) You cannot be enrolled in any other health coverage plan
3) You cannot be enrolled in Medicare
4) You cannot be claimed as a dependent
In summary, the HSA is a great vehicle for saving money if you have a high deductible plan. It can also be a nice bucket to save into for medical expenses in retirement. Finally, if you can pay for medical expenses out-of-pocket you can later reimburse yourself with money that has grown tax-free and that you pull out tax-free!