I’m going out on a limb this year. I’m trying an HSA (Health Savings Account). I’ve long been a fan of FSA’s (Flexible Spending Accounts), those accounts where you set aside money tax-free to be used for qualified medical expenses. If you’ve used these too, you may know the rush at the end of the year as you make sure you use up all the money because whatever you don’t use, you lose. One year I paid my dentist for a mouth guard on December 31st so I wouldn’t lose any FSA money. My New Year’s Eve present.
No More December Rushing
When Health Spending Accounts (would they stop using account names that sound so similar!!) first came out, I was cautious. One big advantage they have over FSA’s is that whatever you don’t use by the end of the year you get to keep. That’s a relief. I don’t want to buy any more New Year’s medical devices.
The Catch
But, in order to contribute to an HSA you need to participate in a high deductible health plan. In essence, you get to set money aside tax-free but you have to agree to foot the bill for a higher deductible to do this. This is where my caution came in. I have kids and you never know when a sports injury or a bad flu season will send us to the doctor more than usual. I wasn’t sure I wanted to take on more of the health care cost risk.
The Details
Then I looked at more of the details. My monthly premiums would go down. High deductible health plans usually cost less than traditional insurance plans, sometimes by a lot. Also, the company was offering to put some of their own money into my HSA account if I participated. That could help give me a cushion if I did have to pay the higher deductible.
Triple Tax Advantage and the Retirement Benefit
HSA’s are said to have a triple tax advantage. You put the money in pre-tax, any growth it experiences in the account is not taxed, and when you use it for qualified medical expenses, you take it out tax-free. Essentially, this money is earned and never taxed as long as you follow these rules. That’s pretty tempting. It’s so tempting that HSA’s are becoming more and more popular every year (total assets were $37 billion in 2016 and expected to be $53 billion in 2018)1. Sometimes they are promoted as ways to save money for health costs in retirement. The idea is that if you save more in the HSA than you spend, you can build an investment account that grows over time and when you’re retired, you can use the money when your health care costs may be higher.
So far I’m pretty happy with the HSA. We haven’t had to go to the doctor much and it’s nice to have an untaxed account of money waiting to pay any bills that do come up. I’m reserving judgement until the whole year of health bills has passed. Either way, I’m adding HSA’s to my financial planning toolkit. Depending on circumstances, they look like they can provide a nice benefit to those who use them.
If you have experiences with HSAs that are good or bad, questions, or just want to discuss the pros and cons of New Year’s Eve medical device purchases, send me a note at krodriguez@symphonyfinancial.net
Kristin Rodriguez
Citations
1 Paikert, Charles, “Rethink HSAs”, Financial Planning, September 2017.