Is a Health Savings Account a good option for you? And if you have one, are you maximizing
the benefits of it? In this video, I’m going to cover the positives
and negatives of HSA’s. And then I will reveal the biggest mistake that 95% of HSA
owners make. And finally, I’ll share my own personal
strategy in how to super charge one of the best features of an HSA.
Welcome to Healthy, Wealthy and Wise where we talk about little things that can lead
to big improvements in our financial and physical health. My name is Kevin and I want to thank
you for clicking on this video and, if you like it, please hit that like button. And
also, don’t be afraid to subscribe—because, after-all, it’s free and it’ll make sure
you don’t miss any upcoming videos. Now let’s talk about this crazy year of
2020 where you may be in a situation reassessing your healthcare needs and options due to an
unexpected job loss or job change and may now be considering an HSA. Or maybe you already
have an HSA, but have heard about an extension in making a contribution for 2019 and wondering
what’s that all about—either way, I’m going to give you some information that will
help you in making an informed decision. If you’re wondering what an HSA is, let’s
first talk about what it isn’t. Many people confuse an HSA with a Flexible Spending Account,
or FSA, which is an account run by your employer where you can put aside pre-taxed money for
healthcare expenses with the understanding that you have to use that money for that year—it’s
a use it or lose it account and there can be a lot of headaches with this in accurately
planning how much expenses you will incur in an upcoming year. A Health Savings Account
is very different in that you actually own the account and can take the money with you
if you leave your job. Also, it’s not a use it or lose it account—your money can
rollover from year to year without any penalty. And another exciting difference between an
FSA and an HSA is that you can invest the money of your HSA, which is not an option
for an FSA; we’ll be talking much more about this in a little bit.
Now if you’re considering signing up for an HSA, you also have to sign up for a qualifying
high deductible healthcare plan to be eligible. For 2020, the minimum deductible for a high
deductible healthcare plan is $1,400 for an individual and $2,800 for a family. Another
criterion to be eligible is that the out-of-pocket maximum for an HSA-qualified health plan cannot
be more than $6,900 for individual coverage or $13,800 for family coverage. When signing
up for a plan, an insurer will generally let you know if it’s HSA-eligible, if they don’t,
you will want to contact them to check into that.
So why would you want to sign up for a high deductible plan?—well, there are some good
reasons. If you are relatively healthy and don’t typically have a lot of medical expenses,
then a high deductible plan might be a great option for you because your premiums are often
significantly less than lower deductible plans. Also many employers will put some money into
your account for you—so that’s basically free money given to you, just like if your
employer puts a match into a 401k for you. Now on the other hand, if you don’t like
high deductibles, you plan to receive a higher amount of medical services, or don’t have
money set aside for unexpected medical expenses..then an HSA may not be for you. But I would challenge
you to look at the difference in the cost of your premiums over the year and you may
be surprised in how much the low deductible plans actually cost. When I was looking at
my options last year, my company’s low deductible plan would cost me about $180 every 2 weeks
out of my paycheck or $4,680 over the course of the year whereas the High deductible plan
cost me about $50 every 2 weeks or $1300 for the year. So over the course of the year,
I would pay almost $3,400 more out my paycheck for the low deductible plan. However, by signing
up for the HSA, my company also put $500 into my account so I really came out almost $4000
better and, since I had low medical needs, I came out way ahead on an HSA.
Okay, now, the exciting part about HSAs are the ability to invest the money in your account—and
all of the tax benefits that go with this. You may have heard people talk about the triple
tax benefits of HSAs and you start to realize that they are not just for your health, but
also can help create wealth—2 of the major things this channel is about! So let’s go
over the 3 tax benefits: One, the contributions you make to the account
are tax-free. Two, any withdrawals you make for qualified health expenses are not taxed.
And number three, any money invested in the account grows tax free. This last part is
super exciting because of the implications—and notable because about 95% of HSA accounts
have no investments, which means that there is no opportunity for the money to significantly
grow. You can receive interest in the account, but we know how low interest rates are now
and how little that will produce. So to clarify, 95% of people are only using
their HSA to pay for health expenses completely tax free—and that’s not a bad thing. And
if it’s difficult to put much more money into your account because of other life expenses,
then that’s what you have to do. In this case, I would recommend that you at least
contribute enough money into your account that covers the deductible on your plan so
that you’re not left with the stress of having to pay a lot of money for unexpected
medical expenses. Now…if you have the ability to put a little
extra money into your account, I want you to start thinking of how your HSA can not
only become a place to hold tax free money for medical expenses, but as a place to grow
money tax-free that can help you big-time in retirement. And I would say that if you’re
someone that is actively planning for retirement, an HSA should be something you absolutely
consider. I would even argue that it could be a wiser decision to fully fund your HSA
before an IRA…or even a 401k above any money you have to put into to get your full employer
match...you always want to get that full match of free money when you can.
Does this sound crazy?? Well let me tell you why it’s not. Because let’s say you put
money in your HSA and never need to take out any withdrawals for healthcare expenses. Well,
when you turn 65, then your HSA becomes effectively like an IRA where you can take the money out
penalty-free for any reasons when it will then be taxed at your current income tax rate—UNLESS—it’s
for Healthcare expenses—which then you can withdraw tax-free! And over the years, because
your money was invested, it actually has grown to be more than what you originally put into
the account. Okay--now I’ll share with you my ultimate
strategy that is good for anyone that does not absolutely need to use their HSA to pay
for expenses at that time you incur them and just requires a little bit of organizational
skills. And that is, for co-pays or small medical costs, I just pay out of my pocket
and don’t take a withdrawal from my HSA, again only because I don’t absolutely need
get reimbursed at the time. But I keep the receipts in a folder labeled unreimbursed
medical expenses—and keep in mind that they do have to be for dates after I established
my HSA. And this is where it’s great—so the money I don’t take out for the healthcare
expense, I let it grow by investing it in my HSA—with annualized returns of about
7% compounded year over year. And then once I retire or if I find myself out of work,
I can get withdrawals from my HSA using my old unreimbursed healthcare receipts—and
those receipts can be from 20 years ago! This is another great benefit of an HSA that I
find many people that have them don’t realize--you don’t have to pull money out of your HSA
to get reimbursed for medical expenses in the same year that you incurred the expense.
And in this way, I can maximize all 3 of the major tax benefits of HSAs, which again, 95%
of people with HSAs don’t do! So now, you’re thinking maybe an HSA is
for you, right? Well let me first share with you the HSA contribution limits that are set
annually by the IRS; for 2020, they are $3,550 for individual coverage and $7,100 for a family.
Keep in mind, if you employer puts in money for you, then that counts against the limit—so
for example, if you employer puts $500 into your account, then you can only put in $3,050
to reach the max contribution for self-only coverage. If you’re age 55 or older, you
can save an extra $1,000 each year to play catch-up. With these annual limits, an HSA
could never replace an IRA or a 401k, but could definitely play a role in your retirement
planning. Now a lot of this sounds really good, but
there are some things that you have to keep in mind when making this decision—the negatives.
One big thing to keep in mind is if you would ever need to pull money out of an HSA before
you are 65 years old and that money is not used for healthcare expenses, you would face
a 20% penalty plus any taxes that may be due. The other major thing to remember, just like
any investment, there are no guarantees that you will have positive returns and could even
lose money—however, history shows us that investments over time greatly outpace interest
earned in savings accounts and inflation. So if you have a weak stomach when the market
has a downturn, which as we know happens, then the investment part of an HSA may not
be for you, although, keep in mind that you will likely have a lot of options within your
HSA brokerage account that are less risky. So you may have heard that due to the unexpected
events of this year, that the deadline to file your federal taxes and make contributions
to your IRA and HSA have been extended to July 15th. If you had an HSA in 2019 and didn’t
reach the maximal contributions for that year, $3,500 for individuals and $7,000 for families—plus
the extra $1,000 if you’re 55 or older, then you can make a contribution to your HSA
up to that limit—you will just want to make sure it’s labeled for 2019, that will lower
your taxes for the year. For state taxes, you will want to check with your specific
state for details. Well that was a lot of information! I would
love for you to comment on if you would like more detailed info. on HSAs and specifically
what you would like to know more about them. I was thinking about doing a comparison with
IRAs and 401k’s if there’s interest. This channel is for you and I want to talk about
the things that you’re interested in. I hope you have found this information helpful,
and if you did, once again, please subscribe to the channel. As always, I hope that we
can all learn from each other on how to take little, easy steps in making big improvements
in our lives. Thank you again for watching and until next time, have a great day!