My November 21 post titled “Open Enrollment” suggested that you Go for the Bronze, meaning that you should strongly consider a Bronze health care plan with an HSA over a Silver or Gold plan. My main reason was the availability of the HSA. I want to expand on the HSA and its benefits in today’s post.
Health Savings Accounts
HSA stands for Health Savings Accounts. You must be enrolled in a Bronze plan that is HSA-eligible in order to contribute to an HSA. (I like that it is “an” HSA but “a” Health Savings Account. Same consonant – H – but a different article. Makes learning English difficult.) Your employer will tell you if your health insurance plan is HSA-eligible. If you get your health plan from the Exchange website, the website will tell you if a plan is HSA-eligible. If your employer or the Exchange don’t tell you that a health plan is HSA-eligible, it isn’t.
The following are the limits of how much you can contribute in 2018:
- Self only: $3,450
- Family Total: $6,900
- Catch-Up Per Person If Over Age 55: $1,000
Tax Advantages
There are 3 ways that an HSA is tax-advantaged:
- You contribute to the HSA account with pre-tax money, so you don’t pay taxes on the money you contribute to the HSA.
- Any growth that the HSA account generates while the money sits in the HSA is tax-deferred.
- If you withdraw the money in the HSA account and use it to pay for qualified medical bills, you don’t pay ordinary income or other tax on the withdrawal.
Therefore, an HSA is even better than an IRA or 401K. With a regular IRA or 401K (i.e., not a Roth), you pay ordinary income taxes on withdrawals from those accounts, no matter what you spend the withdrawals on. With an HSA, if you use the money for medical expenses, the withdrawal is not considered ordinary income. You have to keep track of what you spend the money on, but that is a worthwhile endeavor if you save money on taxes.
Save for Future Medical Bills
HSA’s are not “use it or lose it”. Unused balances in HSA accounts can be rolled over to be used for future years’ medical expenses. Think very far in the future. Think of an HSA as a way to save tax-free and tax-deferred for your medical expenses that you probably will incur when you are older. When you hit Age 65 and go on Medicare, you will probably want to purchase a Medicare Advantage plan. Advantage plans effectively provide a cap on what your out of pocket medical expenses will be as an older person, but such plans can be expensive. This is when you are probably retired and not making as much money. So, it is highly advantageous to save when you are working to pay for your medical expenses when you are older. Use your unused HSA account balances to pay for your Advantage plan premiums.
Tax Bracket Play
Depending on your current and projected future tax brackets, another play to consider is to forego using HSA balances to pay for current medical expenses in order to save the HSA balance to pay for future medical expenses. This strategy works if you have enough money now to cover your current medical expenses, and/or if you don’t go to the doctor often now so you don’t incur a lot of current medical expenses. Contributing to and holding the HSA now may not help you that much in your current tax bracket, but it may really help you in the future to have the tax-free income to pay for your medical expenses when you are older. Also, if you have contributed money to a tax-advantaged account such as an HSA, you realize the benefit more if you leave the money in the tax-advantaged account. The account can grow over time without paying taxes so that you will have all that much more available when you are older to pay your medical bills. If money is currently tight for you and you need to use your current year HSA contributions to pay for your current year medical bills, then so be it. But, you should consider covering your current medical bills with other funds, if you have them available to you, and let the HSA grow tax-deferred.
IMO
These are just ideas for you to consider as you enroll for 2018 Benefits. I believe HSA’s have a lot of advantages and you should look at how to use them if your situation permits it.