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Well it's open enrollment time, and now that I've been self-employed since April, I am responsible for my own health insurance. I've been told an HSA would be perfect. I just signed up for a high deductible plan with an HSA qualification. It's a $6,900 deductible and it'll cost me about $110, give or take (I don't have it in front of me as I type this). I haven't pulled the trigger yet officially, but have signed up for it and it won't be official until I make my first payment.
Anyways, opening an HSA. I'm interested, but can someone please explain to me what it'll do for me and the benefits and what I do after I open an account? I haven't fully grasped it yet and reading about it just confuses me. So let's pretend I'm 5 years old lol.
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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I had a high deductible with HSA until I turned 65 and signed up for medicare part A, now still working switched to my employer's alternative deductible plan. You cannot have a HSA if on Medicare. The advantage to your plan is that if you are healthy and not using much in the way of doctor/hospital visits, that HSA is growing every paycheck, and when you do need it, will have the money to cover that high deductible. That money going into the HSA is also taken out before taxes, so if you have a pretty high income, you are saving money by paying less income tax.
The key to success is not getting sick or badly injured until you have built up some HSA funds. In our case, by participating successfully in an employee wellness plan, the employer contributed $1,200 to my HSA every January, and as it turned out, with my $100/month contribution, that $2,400/year more than covered my expenses.
Since then, however, while on the deductible plan, with annual out-of-pocket maximum of $2,000 I have had some serious health issues, and both 2019 and 2020 met that by February.
All the rest of those two years it cost me only the monthly premium out of my check, no more deductible or copay. With the HSA that would have been $6,000 each of those years, and I would not have had enough in the HSA to cover that much. As you get older, and hopefully get raises, it's good to increase your HSA contributions.
A Health Savings Account is a tax-advantaged account that lets you save pre-tax dollars for future qualified medical expenses. The funds can usually be invested in a number of ways - equity mutual funds, bond mutual funds, money market funds, etc.
The funds are always yours. They are in your account and never expire.
The beauty of the HSA is that you put money in on a pre-tax basis and if you use the funds for qualified medical expenses, what you withdraw is tax free - both your original contributions and all the earnings.
You can use the HSA to cover current out-of-pocket expenses and anything left over at the end of the year just stays in your account.
A lot of the finance people at my Fortune 500 company have been putting the maximum into their HSA accounts every year; investing the account balance in a low-cost equity index fund; and paying all their current deductibles, copays, and coinsurance in cash, with the idea that the balance in the HSA can grow tax-free for decades and then be used in retirement to fund retiree healthcare costs tax-free - Medicare premiums, deductibles, copays, coinsurance, premiums for long-term care insurance, dental, vision, hearing, etc. An HSA can be used for numerous types of medical expenses in retirement, except an HSA cannot be used to fund Medigap premiums.
So, if used this way, the HSA is better than a 401k (since everything you take out of the 401k is taxed) and better than a Roth vehicle (since the dollars going into the Roth are after-tax).
Another nice thing is that, if you go this route, you should save documentation for all your out-of-pocket qualified medical, dental, and vision expenses because you can take those expenses out of the HSA tax-free at any later date. So, if 5 or 10 years down the road you realize you need the funds that you had been spending out-of-pocket for medical expenses, you can take all those expenses out of your account tax-free, up to the entire balance in your account.
In addition, once you reach age 65, you can take money out of the HSA with no medical expense documentation and just pay regular income tax on what you take out (no penalty). Then you have, in essence, used the HSA as a 401k.
Last edited by CharlieAllnut; 11-11-2020 at 01:20 PM..
I had a high deductible with HSA until I turned 65 and signed up for medicare part A, now still working switched to my employer's alternative deductible plan. You cannot have a HSA if on Medicare. The advantage to your plan is that if you are healthy and not using much in the way of doctor/hospital visits, that HSA is growing every paycheck, and when you do need it, will have the money to cover that high deductible. That money going into the HSA is also taken out before taxes, so if you have a pretty high income, you are saving money by paying less income tax.
The key to success is not getting sick or badly injured until you have built up some HSA funds. In our case, by participating successfully in an employee wellness plan, the employer contributed $1,200 to my HSA every January, and as it turned out, with my $100/month contribution, that $2,400/year more than covered my expenses.
Since then, however, while on the deductible plan, with annual out-of-pocket maximum of $2,000 I have had some serious health issues, and both 2019 and 2020 met that by February.
All the rest of those two years it cost me only the monthly premium out of my check, no more deductible or copay. With the HSA that would have been $6,000 each of those years, and I would not have had enough in the HSA to cover that much. As you get older, and hopefully get raises, it's good to increase your HSA contributions.
Quote:
Originally Posted by CharlieAllnut
A Health Savings Account is a tax-advantaged account that lets you save pre-tax dollars for future qualified medical expenses. The funds can usually be invested in a number of ways - equity mutual funds, bond mutual funds, money market funds, etc.
The funds are always yours. They are in your account and never expire.
The beauty of the HSA is that you put money in on a pre-tax basis and if you use the funds for qualified medical expenses, what you withdraw is tax free - both your original contributions and all the earnings.
You can use the HSA to cover current out-of-pocket expenses and anything left over at the end of the year just stays in your account.
A lot of the finance people at my Fortune 500 company have been putting the maximum into their HSA accounts every year; investing the account balance in a low-cost equity index fund; and paying all their current deductibles, copays, and coinsurance in cash, with the idea that the balance in the HSA can grow tax-free for decades and then be used in retirement to fund retiree healthcare costs tax-free - Medicare premiums, deductibles, copays, coinsurance, premiums for long-term care insurance, dental, vision, hearing, etc. An HSA can be used for numerous types of medical expenses in retirement, except an HSA cannot be used to fund Medigap premiums.
So, if used this way, the HSA is better than a 401k (since everything you take out of the 401k is taxed) and better than a Roth vehicle (since the dollars going into the Roth are after-tax).
Another nice thing is that, if you go this route, you should save documentation for all your out-of-pocket qualified medical, dental, and vision expenses because you can take those expenses out of the HSA tax-free at any later date. So, if 5 or 10 years down the road you realize you need the funds that you had been spending out-of-pocket for medical expenses, you can take all those expenses out of your account tax-free, up to the entire balance in your account.
In addition, once you reach age 65, you can take money out of the HSA with no medical expense documentation and just pay regular income tax on what you take out (no penalty). Then you have, in essence, used the HSA as a 401k.
Thank you both so much for your words! I appreciate it! I am currently about to pull the trigger on setting up an HSA. I really appreciate you both explaining it to me. Makes total sense!
One of the best pieces of advice my financial planner gave me was to fund an HSA account back when I was a high earner. Now that I am retired I am using that money for dental care, eyeglasses, Rx copays and medical copays and deductibles. It's a really good deal.
Another nice thing is that, if you go this route, you should save documentation for all your out-of-pocket qualified medical, dental, and vision expenses because you can take those expenses out of the HSA tax-free at any later date. So, if 5 or 10 years down the road you realize you need the funds that you had been spending out-of-pocket for medical expenses, you can take all those expenses out of your account tax-free, up to the entire balance in your account.
Learn something new everyday. I didn't realize you could do this.
I won't get into what qualifies you, but if you have the option of opening one, think of it as a black box.
A bank or investment firm creates the black box and holds it for you. Any money you put into the black box is not taxed. Every firm has different investment options- I have mine invested in stock mutual funds but if you prefer something safer such as money market, most have that option. Any money you take out for qualified medical, dental, vision, etc. expenses is not taxed, but keep receipts. And, if I'm interpreting Charlie Allnut's post correctly, you can even pay, say, $1,000 out of pocket for a root canal in 2020 and then withdraw $1,000 in 2022 and say it was for the 2020 root canal and not owe taxes.
Typically the black box can be moved from one firm to another. Not sure if that's true of one your employer provides, but after I left my last job I moved mine twice with no tax consequences. It's important to have the transfer made between the firms and not have any $$ pass through your hands, but they know how to do that.
You can withdraw it for anything that would qualify as a Medical deduction on your taxes. I once got reimbursement for DH to fly from KC to Johns Hopkins to consult with a specialist there about a rare disease he had (polycythemia). We used Hilton points for the hotel. I had to bump it up to a supervisor but finally they looked into it and reimbursed me.
Well it's open enrollment time, and now that I've been self-employed since April, I am responsible for my own health insurance. I've been told an HSA would be perfect. I just signed up for a high deductible plan with an HSA qualification. It's a $6,900 deductible and it'll cost me about $110, give or take (I don't have it in front of me as I type this). I haven't pulled the trigger yet officially, but have signed up for it and it won't be official until I make my first payment.
Anyways, opening an HSA. I'm interested, but can someone please explain to me what it'll do for me and the benefits and what I do after I open an account? I haven't fully grasped it yet and reading about it just confuses me. So let's pretend I'm 5 years old lol.
Thank you!!!
Before you do the HSA you need to have $6900 in an emergency fund. You do need to cover the deductible. If you don't use/need it, still available for another year.
There are restrictions on how much to fund HSA per year. For most singles is only $3600 with $1000 more if you are over 50. Like an IRA, the $3600 saves some on taxes. Figure about 1/2 of a $6000 IRA. Amounts over the limit ae taxed. In an FSA you would have to use the money or lose it. For a FSA to work the deductible would have to be only about $1000.
The health insurance may have estimators for common items. Break a leg, go to ER, maybe have surgery, see a doctor how often, get prescriptions, anything else. The $6900 could mean an accident may include the above with 2 days in the hospital then more time in rehab. This may pick up where AD&D or auto insurance policies end.
Over time is where the HSA begins to shine. Figure another account with 1/2 the value of IRA. The money grows tax free. You use it later to get prescription, medical supplies, non prescription items.
You put money in an account (HSA) for health stuff you know you are going to need (for example, kids braces). You do not pay taxes on that money.
HSA is not insurance and is often confused as such. It is simply a type of bank account.
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