"These medical fees are absolutely ridiculous! It's like we're being shaken down by the medical mafia or something..." - Overheard in a Dr.'s office waiting room somewhere in Atlanta, GA.
Yes I know, healthcare costs are absolutely out of control. We feel it in our family, too.
It feels like we're being shaken down by the medical mafia anytime we cut a finger or stub a toe, right?
Believe it or not, we are actually able to mitigate some of this "shakedown" nonsense by using an HSA.
Have YOU ever considered using an HSA for your health insurance requirements?
Or if you're already using one, are you aware of all the amazing benefits it offers?
A Health Savings Account (HSA) is nothing more than a high deductible health insurance policy that has a health savings account attached to it.
First let's start with what a Health Savings Account is. Here’s healthcare.gov’s definition of an HSA:
"(An HSA is) A plan with a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but you pay more health care costs yourself before the insurance company starts to pay its share (your deductible).
A high deductible plan (HDHP) can be combined with a health savings account (HSA), allowing you to pay for certain medical expenses with money free from federal taxes."
An “HSA” is also known as a High Deductible Health Plan or HDHP for those of us who don’t have enough acronyms in our lives. :)
Warning: Do not confuse HSAs with other health-related accounts like FSAs and HRAs because they are very different and definitely aren’t as good. For example, HSA funds do not “expire” like FSA funds do.
Most HSAs have 100% coverage once you meet the (high) deductible (which can be upwards of $3-5k+ per year). This high deductible is the the very reason there is a health savings account attached to the insurance policy, so you can set money aside for this very high deductible with pre-tax dollars. Some do have copays, so you'll want to check on your particular policy.
Your monthly insurance premiums are usually going to be much lower than more “traditional” insurance policies (i.e. HMO, PPO, etc.). Take THAT, medical mafia!
Again, you have the ability to save pre-tax dollars in an adjoining savings account to help cover these rather hight deductibles. Don’t underestimate the “pre-tax” part. More on that later.
The funds in this savings account (meant to help you offset your deductible) can also be placed into a brokerage account and invested into other financial instruments like mutual funds so that they have the ability to grow (again, pre-tax). This is normally WAY better than just having the funds sit in a (typically) low interest bearing savings account.
An HSA can actually behave much like an IRA or Roth IRA and can be a solid plank in your retirement platform. This one is a little advanced, so I’ll unpack it later in the post.
So again, an HSA is an insurance policy that:
1) covers you 100% after you’ve met the annual deductible,
2) offers a lower premium WITH,
3) the ability to save before tax (or pre-tax) dollars in a savings and account.
And, 4) remember that you can also use a brokerage account to invest and grow those pre-tax dollars in the savings account which then turns it into
5) a "super-hero" additional IRA account.
That’s pretty epic, right?
Example: If you have a $1200 medical expense and you use your HSA savings account's pre-tax dollars to pay, it’s like you’re only paying about $800 (again, because you’re paying the bill using pre-tax or “untaxed” dollars).
By the way, you'll want to make sure your expense is an "IRS-qualified medical expenses”.
Whereas, if you pay with “after tax” dollars, you’ll be paying the medical bill PLUS whatever taxes you had to pay for that income you’re using to pay the bill.
I know it’s a little bit of mental gymnastics at first, but in time you’ll see that the pre-tax savings and investing advantages are pretty huge.
Additionally, even if you don’t fund the savings account portion (which I HIGHLY recommend that you do), the health insurance premiums are much cheaper than more traditional (i.e. HMO, PPO, etc.) plans.
Keep more of these guys by reducing your taxable income with an HSA.
Remember when I said earlier not to underestimate the "pre-tax" nature of the dollars you put into and HSA?
Well, another fantastic ancillary benefit to owning an HSA is that, your pre-tax contributions to the savings account ALSO reduce your taxable income.
So, by maximizing contributions to your HSA, you’re simultaneously minimizing your tax burden.
How? When you contribute the maximum amount to your HSA each year, you’re decreasing your federal taxable income by that amount.
Here’s an example of how it works from Brandon over at "The Mad Fientist":
"The contribution limit for 2018 is $3,450 for individuals and $6,900 for families.
Assuming your family is in the 24% marginal tax bracket, maxing out your HSA could save you $1,656 in taxes each year!"
Additionally, when you contribute via payroll deduction, you’re able to avoid paying FICA taxes (i.e. Social Security and Medicare) on your contributions. Beautiful!
I don’t know about you, but I’m always looking for legal ways to do reduce my taxes!
If you're very very sick and have to use medical services, you have the advantage of paying your deductible and for certain products and services out of your pre-tax Health Savings Account.
The other time it’s great is if you’re really healthy, i.e. you never have to use medical services.
These are the 8 steps I followed to eliminate $43,000 in debt in 2.5 years. Trust me, they work!
Remember our “8 Steps To Erase Debt”? If not, here’s a free download to use as your debt-elimination foundation.
Below, I’ve outlined the steps below with an emphasis on when to and, equally importantly, when not to fund the savings account portion of your HSA.
So again, the caveat for debt-eliminators on Step 3 (or Baby Step 2 in Dave Ramsey’s system) is that we don’t want you to fund the HSA until you’ve completed your debt snowball AND fully funded your 3-6 month emergency fund (i.e your list of debts smallest to largest) UNLESS you have a known medical issue on the horizon.
In this scenario, you still have your $1000 emergency fund, but again, if you’re working the debt snowball, you’re not funding the HSA savings account piece yet.
I’ll admit this part is a little advanced, so don’t get discouraged if it takes a couple of reads to “get it”. Don't worry, it took me a while, too. 🙂
This strategy was first illuminated for me by one of my favorite financial independence podcasters/bloggers I mentioned earlier, Brandon over at "The Mad Fientist".
By the way, if you are serious about eliminating debt and ultimately creating some level of financial independence, you will find his content both highly educational AND, more even importantly, actionable.
Here’s Brandon's brief encapsulation of why an HSA can be a GREAT retirement account:
“Like a Traditional IRA, your contributions to the HSA are pre-tax contributions and your contributions are allowed to grow tax free.
If you don’t use your HSA funds for medical expenses, you can begin withdrawing money from your HSA account for any expenses after you turn 65, without penalty.
You’ll have to pay income tax on any distributions that aren’t for qualified medical expenses, just like you would with a Traditional IRA, but you won’t incur any additional penalties or fees."
Therefore, after the age of 65, an HSA is nearly identical to a Traditional IRA but it’s still better because your withdrawals for medical expenses are still completely tax free!"
An HSA is yet another tax advantaged retirement account you should be taking advantage of.
I mean, that’s pretty cool, right? An HSA as yet another tax advantaged retirement account! Nice!
So again, if you “need" those HSA funds, you just submit the receipts for your "IRS-qualified medical expenses".
Then, you have access to your HSA funds (as a tax-free “reimbursement”) any time you need them.
And even better, all of this regardless of WHEN the medical expense was incurred. Be sure to make digital copies of all of those receipts!
If you don’t need or want to use your HSA funds, you can just leave them in the account up to or after age 65. Then, you have two scenarios:
"What about you? Do you currently have an HSA account?
If so, leave a comment and tell me roughly how much money is it saving you in taxes each year that you max it out"
An HSA is a fantastic way to minimized your medical premiums, set aside pre-tax dollars to invest AND reduce your federal taxable income.
If you’re not currently using an HSA, I highly recommend you look into it during your next enrollment period.
If you are currently using one, I challenge you to maximize the HSA’s strengths by maxing out your contributions and evaluating the potential long-term/retirement benefits.
Don’t hesitate to reach out with questions. While I’m not necessarily an HSA “expert”, I can likely still point you in the right direction.
Dave Ramsey’s Analysis:
0. Stop All Retirement Investing (Until Step 4)2. Starter Emergency Fund of $10003. Eliminate Debts Smallest To Largest (a.k.a The Debt Snowball)4. Full Emergency Fund of 3-6+ Months’ Expenses5. Invest A Minimum of 15% Income Into Retirement Accounts (and increase savings rate to 50%+ if possible)6. College Funding (if applicable)7. Pay Off The Home Mortgage8. Build Wealth, Serve, Be Ridiculously Generous And Go FI (Financial Independence)!