One of the financial products gaining a lot of attention lately is the Health Savings Account (HSA). This is because the HSA makes it possible for you to set aside money for your medical expenses without a lot of trouble. And because HSAs are connected to high deductible health plans (HDHP), they are usually used in conjunction with lower premiums.
I am pretty happy with my HSA. I have a HDHP, so I pay more out of pocket, until the deductible is reached. However, I pay half the monthly premium that I used to. I put the money I save into a HSA, to use to help pay the out of pocket medical costs. As a result, more of my money is mine, instead of going to the insurance company.
That’s the important thing to remember about the HSA. The money is yours. No matter who is offering the account, the money is yours. It’s even possible for you to open a HSA with a custodian that isn’t your employer’s choice, or your health plan’s choice. And you can rollover your HSA to another custodian as you like.
In essence, if you do it right, having your HSA can be like having another investment account.
Investments in Your HSA
An HSA actually combines the best element of a Traditional IRA (tax deduction for contributions) with the best element of a Roth IRA (tax-free growth). Additionally, it’s possible to hold various investments in an HSA. Most HSA custodians offer money market type assets, so the returns aren’t that great. However, it is possible to find some independent HSA custodians that will allow you to choose to hold various index funds (there are a few custodians that offer Vanguard funds), or even stocks. Of course, the riskier the assets you include in your HSA investment, the greater the chance that your account loses value during a market event.
The money grows in your HSA as it would in any IRA. However, you do have to be careful about how you use the money. You can withdraw the money — contributions and earnings — anytime for qualified medical expenses penalty-free. If you use the money for non-medical expenses, though, you will have penalties. You will have to pay taxes on the withdrawal as though it is regular income. And you will have to pay a 10% penalty on top of that. Additionally, for family plans, the HSA contribution limit for 2012 is $6,250 (the limit for singles is $3,100). That means you can put more in the HSA than you can in an IRA. And, even though the HSA is similar to an IRA, it is not considered the same thing so it doesn’t count against your eligible IRA contributions.
Happily, though, once you reach age 65, you no longer have to worry about the 10% penalty. At age 65, that penalty is waived, and your HSA becomes just like another Traditional IRA, and you just pay your regular income tax on the amount you withdraw. If you don’t have a lot of health care expenses, you can save up money over time, rather than paying extra for health insurance that you don’t use very often.
If you have a lot of health care expenses, though, this might not be the route for you. Paying a high deductible when you know that you will hit it every year, plus still have to pay premiums and co-pays later, can drain away your wealth at a rate that might not be replaced by the returns offered by your HSA. Carefully consider your situation before you make that choice.
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We have a high deductible plan but it is not associated with an HSA. However, it is still a great value. It was offered as one of three health insurance options tied to my wife’s teacher retirement. The difference in premium between the high deductible plan and the low deductible plan, more than pays for the deductible for one of us. In other words, unless both my wife and I reached out deductibles in the same year, we come out ahead with the high deductible on premium savings alone. And like you, we use the savings to fund a budget account to pay out-of-pocket expenses, which are not that bad since we still get the insurance discounts by staying in our provider network. For example, a routine office visit to our primary physician is billed at $90.00. The insurance discount is $30, so we pay $60. If we had the low deductible plan we would have paid a $25 co-pay. So the difference is only $35.
What we like about a high deductible plan is that we only pay for the services and products we use, even though we pay out of pocket. With the low deductible plan, we would have paid for services and products whether we used them or not through higher premiums. We have been on this plan for 3 years and have saved $10,200 on the difference between premium and out-of-pocket for the high deductible and the premium alone for the low deductible plan we were offered. It looks like I’ll reach the $4,000 deductible for me for the first time this year due to a recent outpatient surgical procedure. Even at that, we are still ahead $6,200.
As you point out, chronic illnesses that require regular hospitalization or surgical or other expensive procedures, or are associated with expensive maintenance or therapeutic drugs could eliminate the savings potential in a high deductible plan. Still, it’s worth the time to run the numbers. Depending on premiums, deductibles, co-pays, and other provisions, the high deductible plan might still be the best choice.
To further clarify your article, HSA funds can be used to pay for any eligible medical expenses that were incurred while your HSA account was in place. Thus, you can use HSA funds to reimburse past expenses years later, after you have allowed the account to grow tax free. This is why I never use HSA funds to pay for current medical expenses. I want that tax free growth on tax-free deposits.