Using a health savings account for medical costs — and retirement
When AT&T switched his health plan several years back, project manager Dave Eis says he found himself with only one option — a high-deductible plan. Today, he sees it as a good thing.
“Cost-wise I didn’t perceive it as negative, because it lowered my premiums. My monthly premiums probably went at the time from $250 down to $60 per month,” he says.
His family insurance policy comes with a deductible of more than $2,600, allowing Eis, 55, to open a health savings account. He uses it to sock away extra money to cover out-of-pocket medical expenses, and has put aside a nice sum.
“I try to avoid tapping into it, and I’ve been able to max out the savings,” he says.
Health savings accounts, or HSAs, can be a good value for some people like Eis. They are investment accounts — like a 401(k) retirement plan or a 529 college savings plan — that can be opened by anyone enrolled in a qualified health insurance plan with a deductible of at least $1,300 for an individual or $2,600 for a family.
But not everyone is convinced. Critics have argued that these accounts primarily benefit young and healthy people who don’t use a lot of medical services and high-income individuals who are more likely to benefit from the investment tax breaks.
You need to be comfortable shelling out 100% of your medical costs until you’ve met your high deductible. For people who aren’t in a position to sock away money in an HSA, this may not be a good option.
HSAs allow you to set aside money, tax free, to spend on a wide range of medical expenses, including doctor visits, prescriptions, eyeglasses, hospital and dental care, as well as some drugstore items. This year, you can set aside $3,350 for an individual policy and $6,650 for families. If you’re 55 or older, you can kick in an additional $1,000 through what’s called a “catch-up” contribution.
According to Mike Thompson, a principal with PricewaterhouseCoopers who specializes in healthcare benefits, HSAs offer favorable tax terms because the money you deposit goes in tax-free, accumulates tax-free and can be withdrawn tax-free as long as the money is spent on qualified healthcare costs.
“If you can afford the high deductible, manage your health expenses prudently and take maximum advantage of the HSA savings vehicle, you can get a lot of value out of your HSA plan,” Thompson says.
Unlike flexible spending accounts, or health reimbursement accounts, if you don’t use all the money you’ve deposited in an HSA in a given year, it carries over into the next year.
HSA-eligible health plans are a fast-growing trend. PricewaterhouseCoopers reports enrollment in these policies offered by employers more than doubled between 2009 and 2014. In 2014 an estimated 17 million people were enrolled in HSA-eligible health plans, according to the Employee Benefit Research Institute, a research organization.
HSAs are often touted as a way to set aside pre-tax money to reduce the immediate sting of rising out-of-pocket costs. But their greatest benefit, experts say, is their power to help people sock away money for retirement.
“I like calling it an IRA on steroids,” says Rick Lindquist, chief executive of Murray, Utah-based Zane Benefits. “Every employee should max out their HSA before their 401(k).”
His reasoning: The current average lifetime retirement healthcare costs for a 65-year-old healthy couple covered by Medicare will be $395,000. For a 55-year-old couple retiring in 10 years, total lifetime healthcare costs would be nearly $465,000, according to HealthView Services, a Danvers, Mass., retirement healthcare planning firm.
“This is the hidden secret that’s behind every door that no one realizes,” says John DiVito, president of Illinois-based Flexible Benefit Service Corp. “We’re all funding for retirement but what we’re not saving for is our healthcare expenses, which is such a big part of retirement.”
To see a list of HSA-qualified expenses, visit the HSA store: hsastore.com.
If you have a high-deductible health plan with an HSA or are planning to get one, experts offer tips on getting the most out of it.
Invest to earn. HSAs are offered by insured banks and credit unions, insurance companies and institutions that offer IRAs. As with a 401(k), the money you deposit can be invested in the market to help your money grow.
But according to a recent report by benefits consulting firm HelloWallet, only 4% of account holders eligible to invest their HSA balances actually choose to do so, letting funds sit in the equivalent of a checking account.
Hold on to your money if you can. There are tens of thousands of qualified medical expenses for which to use HSA money.
But according to Lindquist, in most cases the best financial strategy is to not touch the funds until you reach retirement.
“Borrow money before you use your HSA,” he says. Because your money accumulates and is spent tax free, waiting to reimburse yourself will save you money in the long run.
Also keep in mind that if you use the money for something other than healthcare costs, you may be subject to a 20% penalty.
Save your receipts for retirement. There is no time limit on how long you can wait to reimburse yourself with funds from your HSA account as long as the medical expense was incurred after you opened your account.
“Basically, you shoe-box all your out-of-pocket expenses,” says Jody Dietel, chief compliance officer at San Mateo-based WageWorks, which administers employer-based benefits.
“Let’s say I have $30,000 in medical expense receipts saved up from the 20 years I’ve been in an HSA. I can take $30,000 out of my HSA at that point, tax free,” Dietel says.
Eis in Missouri is sold on the value of his HSA, and at 55 he’s got his eye on his account’s future use.
“My view is when I retire I want to have that money there to help with medical costs because it’s such a tax-advantaged savings.”
Zamosky is the author of “Healthcare, Insurance, and You: The Savvy Consumer’s Guide.”