Do you have a high-deductible health plan (HDHP)? If so, you are probably eligible to contribute to a health savings account (HSA), which some are calling an IRA on steroids. These accounts are seriously worth considering. Here’s why.
A Triple Tax Advantage
An HSA account can be better than an IRA because it offers a triple tax advantage.
- Your contributions are pretax or tax deductible, which lowers your tax bill when you contribute.
- Any money you withdraw for healthcare can be taken out without paying taxes on interest and earnings.
- Once you reach age 65, nonmedical withdrawals are taxed at your current tax rate, just like an IRA. Medical withdrawals, however, are tax free.
Clearly, with these tax advantages maxing out an HSA makes a lot of sense, provided your annual health costs are not too high.
Employer Plan Benefits
If your health insurance is through your employer, you may see some additional benefits.
- Your healthcare premiums are usually lower with an HDHP. (That’s because you have a high-deductible health insurance plan.)
- Your payroll taxes will be lowered because of your HSA contributions.
- The HSA provides you with a way to put more money away for retirement tax free.
- You’ll have money you can use when you get older and are more likely to need additional medical care. Also, the HSA can pay for expenses that health insurance and Medicare cover poorly or do not pay at all, such as long-term care, hearing aids, eye care or dental care.
- And, of course, you can use the account to pay health expenses now, if you need to.
Contribution Levels and Out-of-Pocket Costs
The maximum amount you can contribute to an HSA in 2017 is $3,400 for yourself or $6,750 for your family. After you reach age 55 you can contribute an additional $1,000 as a catch-up contribution.
These benefits come with costs that you must be prepared to cover. Your HDHP plan must have a deductible of at least $1,300 for yourself and $2,600 for your family, and your HDHP’s maximum out-of-pocket amounts cannot exceed $6,550 and $13,100, respectively. The preceding numbers will go up slightly in 2018: $3,450 and $6,900 for HSA contributions; $1,350 and $2,700 for HDHP deductibles; and $6,650 and $13,300 for HDHP out-of-pocket amounts.
You can only make HSA contributions when you are covered by an HDHP, though not all HDHPs are eligible. Any health plan that gives you benefits beyond preventive care does not qualify as an HDHP. For example, if your plan provides medical appointments with a co-pay, such as $20, after which the plan pays the remainder of the costs, it will not qualify as eligible for an HSA.
You must be required to pay all medical costs until you meet your deductible to qualify for an HSA. The one exception: preventive care.
Investing Your HSA Contributions
Another key consideration is how your HSA plan allows you to invest your money. Some plans provided through banks are no more than savings plans, which won’t allow your funds to grow significantly.
You can find plans that offer more investment alternatives, such as HSABank, which has a TD Ameritrade self-directed brokerage option, or Health Savings Administrators, which includes 400 mutual-fund options for your HSA account.
Is an HSA Good for You?
If you already have a qualified HDHP, the answer is a no brainer: yes. If you don’t, you need to consider whether you want to take on the risks of paying for all your medical care until you reach your deductibles. With a high-deductible plan, you are looking at a maximum of $6,550 for individuals. While you can draw from the HSA for medical care, if you find you must drain your HSA every year, it will not provide you with much retirement savings and thus is probably not worth considering.
HSAs make the most sense for people who have minimal healthcare costs and want to save for their health needs in retirement. If you want to explore using HSAs, first investigate the type of HDHP plans available and be sure that they match your current health needs.