How to Maximize the Value of Your Health Savings Account
Healthcare in the United States can be insanely expensive regardless of your health, but health insurance doesn’t always help cover the costs in the long run. After all, the lowest tier of health insurance plans – called âBronzeâ plans – only cover 60% of healthcare expenses, according to Healthcare.gov. In addition, health insurance plans in 2019 have a maximum limit of $ 7,900 for individuals and $ 15,800 for families. For most people, that’s a ton of cash to fork out before insurance kicks in to cover the rest.
But, there is at least one way to save money on rising healthcare costs – and that’s by opening a Health Savings Account, or HSA. This type of account saves you tax-advantaged dollars for future healthcare expenses, and you don’t have to pay taxes on distributions when you withdraw money to cover eligible healthcare bills. .
Who can use a health savings account?
To get the most out of a health savings account, you need to understand how they work. It all starts with the fact that there are limits to how much you can contribute each year, as well as rules that govern the type of health insurance plan you need to use an HSA.
Contribution limits increase each year to take account of inflation and rising costs. For 2019, the HSA contribution limits for people with qualifying health care plans are $ 3,500, up from $ 3,450 in 2018. Families, on the other hand, can set aside $ 7,000 in a health care account. health savings instead of the $ 6,900 they could contribute in 2018. If you If you are 55 and over, you can also contribute an additional $ 1,000 to your plan using what is called a “contribution of catching up â.
To use an HSA, your health insurance plan must also meet specific requirements. For example, individuals must choose plans with a minimum annual deductible of $ 1,350 and a maximum reimbursable amount of $ 6,750 in 2019.
Families should choose plans with a minimum annual deductible of $ 2,700 and a maximum reimbursable amount of $ 13,500.
Because of these very specific requirements, not all health care plans qualify for a health savings account. And if you want to use one to save for your future health expenses, you’ll want to keep that in mind when choosing a health insurance plan.
The advantages of an HSA
While saving for future expenses can help you gain peace of mind, the main benefit you’ll get with a health savings account is tax savings. This is based on the fact you can deduct contributions from your health savings account each year within the limit of the annual ceilings. In other words, contributing to an HSA will directly reduce the amount of your taxable income.
Not only that, but the money in your HSA can grow tax free as long as you keep it in your account. And when you need to withdraw cash to cover qualifying health care expenses, you won’t have to pay income tax on your distributions.
To sum up, health savings accounts benefit you in three main ways: they allow you to save for health care expenses while reducing your taxable income, your money grows tax-free, you don’t so no income tax to pay when you take the money. to cover medical costs.
How to use your HSA to fund your retirement
This trio of tax savings is the number one reason many financially savvy families fund their health savings accounts, whether they think they need the money or not. Because you can receive distributions from your health savings account at age 65 without penalty (and tax-free), more and more people are using them to fund their retirement goals.
Think about it: you can contribute up to annual limits each year and thus reduce your taxable income. From there, your money grows tax-free.
If you are able to keep your HSA funds in your account until age 65, the IRS no longer requires you to use the money for qualifying health care expenses. At this point, you can use your savings to supplement your retirement income.
This is part of the reason why John Goodman, contributor to Forbes, states that “no other savings vehicle can outperform an HSA.”
Your health savings account is even better than your 401 (k), your IRA and even a Roth IRA, he says, because of the triple tax savings and the fact that you can save your money up to 65. years, then use it as you see fit.
Getting the most out of a health savings account
The obvious way to maximize a health savings account is to contribute as much as the law allows each year. Ideally, you’ll also let your funds in your HSA grow for as long as you can, even if that means covering healthcare expenses with other funds you have available. Since your HSA funds can grow tax-sheltered and distributions eventually will, there is a huge incentive to save the most and leave your HSA alone.
Also note that you can maximize your income by choosing the right health savings account to start with. There are a ton of health savings accounts to choose from, with different investment options and ongoing costs.
As an example, Fidelity and Lively both offer great HSA options, as they come with a first dollar investment with no minimum balance required. They also allow you to invest in a variety of investment products, some of which may be commission-free.
If you do decide to set up your own HSA account, be sure to look for a provider with low fees and several investment options to choose from. By making sure your HSA dollars are invested for the long term with minimal fees, you can get an even greater return on your savings over time.
The bottom line
There is nothing most of us can do about the rising costs of health care except to seek out health insurance plans every year and hope for the best. But we all have some control over how we save for future costs – and how we use that money.
A health savings account is the smartest vehicle to use for future health care expenses, although you should be careful when selecting a qualifying health care plan if you are hoping to contribute.
And, if you’re one of the lucky ones and don’t have huge medical bills before you qualify for Medicare, you can even withdraw your HSA funds tax-free and use them in retirement. When it comes to tax-efficient savings accounts, it doesn’t get much better than this.