Unlike many financial planners and personal finance bloggers who tout the benefits of a health savings account (HSA) – I actually have one. That is not to say of course that just because someone does not have a Health Savings Account that this somehow precludes them from talking about the benefits of HSA’s but as someone who has studied HSA’s, runs a consumer health insurance website, who owns a Florida health insurance agency that sells HSA’s, and also as someone who has personally had an HSA for close to 4 years I can say without reserve that I think there are many benefits to having an HSA. Here are 5 reasons why you should consider using an HSA yourself (and then please let me know your thoughts on HSA’s via the comments below):
#1 Tax Savings, Tax Savings, Tax Savings
When I began to make this list I quickly realized that I could fill up even a much longer list of HSA benefits strictly from the tax savings category. I love Health Savings Accounts because they enjoy in a sense a triple benefit of tax savings goodness. What do I mean by that?
1) Contributions to an HSA are deductible as an “above the line” deduction on the front of your 1040 personal income tax return with NO AGI phaseouts (Bill Gates can take the same HSA contribution deduction that you or I can – incidentally, if Bill Gates saw a $1,000 bill on the ground it technically would not be worth his time to pick it up according to this estimate – just something to think about 🙂 )
2) All of the money in an HSA grows tax free and rolls over from year to year (note that I said “tax free” like a Roth IRA and not “tax deferred” like a traditional IRA)
3) Money in the HSA that is used for qualified medical expenses OR for retirement past the age of 65 comes out 100% tax free.
This triple tax benefit is rarely seen in the tax code because quite often if you get a tax deduction for a contribution to something then you end up paying taxes on the back end (and example would be a traditional IRA) and if you pay taxes on the front end then you may be able to take out money on the back end tax free (an example would be the Roth IRA). The beauty of the HSA is that you get tax benefits for contributions (up to certain annual IRS limits), annual growth in the account, and even when you use the money in the HSA.
#2 High Deductible Health Plans are CHEAP
While an HSA is strictly the savings account portion of the “HSA health plan” the true health insurance plan component (required in conjunction with the HSA by the IRS) is the high deductible health plan or HDHP. The beauty of the HDHP is that since they are by definition health plans with high deductible then the monthly premiums are much lower than traditional health plans with low deductibles and copays. The higher the deductible the lower the monthly premium. After all, even if you are typically a fan of low deductible health plans don’t you think that monthly premium savings of $100 or more a month to accept a deductible that is $1,000 or so higher (in some cases) is well worth it? Why not put that monthly savings into your HSA and let the money accumulate from year to year and simply use the funds in your HSA should you have a large medical expense?
#3 HSA Setup is Simple
If you can set up a savings account or a checking account then you have all of the necessary expertise for setting up a health savings account as well. If you should decide to set up an HSA for yourself be aware that when you apply for your required high deductible health plan from a health insurance company that although almost every health insurance companies will attempt to steer you into also setting up your health savings account with the bank that they recommend (or in many cases own) then you are certainly able to (according to the IRS anyway) set up your HSA at a different bank altogether that may offer you a higher interest rate, lower fees, the chance to invest some of your HSA funds in the market, etc. HSA setup is simple but just like you should shop around for the best online savings account rates and also just like you likely shopped around for the best insurance quotes before choosing a health plan you should also shop around to find the best HSA bank for your needs.
#4 HSA’s Help to Bend the Health Care Cost Curve Down
Rising health care costs in the US is a certainly a concern almost regardless of who you ask – from either political party (wow – consensus across party lines on something!). When you use an HSA and act as a price conscientious shopper for your health care – in fact, even if you are 1/10 as price conscious as you are at the grocery store shopping for groceries then you likely are much more price conscious than the average US consumer, you help to drive health care costs down for everyone.
Essentially, when the system is set up so that 100% of the costs are borne by a 3rd party payor (i.e. the insurance company) starting at dollar 1 then people have no incentive to price shop or even care one flip about the cost of their physical, colonoscopy, pap smear, etc.
However, if you are responsible for paying for your health care bills out of your HSA (until you reach your deductible and then your HDHP kicks in) then you will likely be much more price motivated then someone with a copay plan and no deductible or a very low deductible.
#5 HSA’s are a Great Savings Vehicle
As I alluded to earlier in the tax savings section you can use an HSA as a very attractive vehicle for accumulating retirement savings. You not only get the great tax benefits all along the way along with a nice growing sum of money that can be used for medical expenses but you also get a great vehicle for accumulating some retirement funds if you should (hopefully) not have to use the money in your HSA for medical expenses. This is also contrasted to a flexible spending account where you have to use the money in the flexible spending account every year – with an HSA the money rolls over from year to year all the while growing on a tax free basis. Compound interest + no taxes = HSA bliss.
What do YOU Think About HSA’s?
Do you have any other reasons for why you think HSA’s are a good idea (or a not so good idea for that matter)?
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