Everything You Need To Know About Health Savings Accounts
Everyone is always looking for that next money hack, most of the time it is right under their nose. Health Savings Accounts are rarely mentioned and widely underused. The lack of attention it gets leads many to leaving tons of money on the table, especially when measured over a lifetime. The Millennial generation should give HSA’s more thought, as they will soon realize they will not be invincible forever (a common trait of the young). Taking care of your health costs with tax deferred compound growth is the ultimate investment in yourself. If you know anything about compound growth, time is of the essence! Start today!
I will say that I’ve intentionally kept the information in this article basic, as their are tons of exceptions and details that would put you to sleep by the end of the first paragraph. Consult your employer or tax professional for a deeper understanding of Health Savings Accounts. This type of approach will benefit you with any tax or financial advice you read about.
If you are self employed, see here for more information on managing your healthcare costs.
Three Pronged Tax Benefit
The Health Savings Account option has come to be known as a triple tax benefit. Contributing your money straight into the account is tax deductible on your Form 1040 (Individual Tax Return Form). If deposited through a payroll deduction (your paycheck), the money will be put in pre-tax. The second tax benefit is that the interest and dividends earned on the principle will be tax free. Lastly, any withdrawals that are deemed qualified medical expenses will be tax-free.
If you are a generally healthy person in your younger years, it may still make sense to contribute to an Health Savings Account. It is well known that health costs rise in our later years of life. If you can afford it, it would be wise to start your planning now.
For instance, let’s say you are 30 years old and you contribute $3,000 toward this account every year until retirement (Age 65). In 35 years, you would have contributed $105,000 of your own money over your working life. Assuming 7% compound interest, you would have approximately $475,000 waiting for you in retirement.
If you choose to procrastinate contributing, the time value of money and compounding will make you pay. Let’s assume you make 7% compound interest (same as above) but you wait to start your contributions until you are 40 years old. In 25 years, you will have approximately $220,000 waiting for you on $75,000 of principle (your own money). So I challenge you, are you willing to leave $255,000 on the table? If your answer is no, I’d be interested to see how you feel at 65. This reminds me of one of the scariest things my father ever told me:
“One day you are going to blink your eyes and be 50 years old”
I’ve done hundreds, maybe thousands of tax returns and seen just a few people utilizing such a strategy. Thats a lot of untapped potential!
How To Qualify or Disqualify
To enroll you must be part of a High-Deductible Health Plan to contribute to a Health Savings Account. Eligibility requires that you:
- Must not be covered by any other health plan that is not a High-Deductible Health Plan
- Must not be receiving Medicare benefits
- Must not be claimed as a dependent on someone else’s tax return.
Qualified expenses include most of the normal health costs. Those copays can really add up!
Note: If you are considering a FSA (Flexible Spending Account) there may be some conflict with HSA’s.
These are just the top level qualifications, as noted before, consult your financial or tax professional for your specific situation.
Your 2016 Form 1040 contribution limits for HSA’s will be $3,350 for Individuals and $6,750 for family coverage. The deadline to have in your money by is April 15, 2017 for the 2016 tax year. Though, if contributing through a paycheck, December would be your deadline.
Both fortunately and unfortunately, I’ve been a witness to those who were able to fund their rising health costs in retirement and to those who weren’t. Seeing the difference first hand is astonishing because financial stress can take a lot out of a person in their 80’s. Most of the time, their kids are left dealing with it while they are in the prime of their life. That being said, I urge you to think of Health Savings Accounts as bigger than yourself. Instead of burdening your children with the financial and mental stress of taking care of their elders, your best gift may just be this fund you set up a lifetime ago. Trusting any entity other than yourself to ensure your health costs is not a sure remedy. Health Savings Accounts may save you a couple grays and maybe a whole head of hair. I promise you will be thankful!